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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 0-22834
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SUCCESSORIES, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2520 DIEHL ROAD 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (630) 820-7200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
$.01 par value Common Stock
(Title of class)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant on March 31, 2000, based upon the last reported
sale price on that date on the Nasdaq National Market of $2.25 per share, was
approximately $11,027,670.
Registrant had 6,933,213 shares of its Common Stock, outstanding as of
March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days of January 29, 2000, are incorporated by reference
into Part III hereof.
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SUCCESSORIES, INC.
FORM 10-K
FISCAL YEAR ENDED JANUARY 29, 2000
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Executive Officers of the Registrant........................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 19
Item 11. Executive Compensation...................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 19
Item 13. Certain Relationships and Related Transactions.............. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 20
Index to Financial Statements and Financial Statement
Schedule.................................................. F-1
1
PART I
ITEM 1. BUSINESS
GENERAL
Successories, Inc., an Illinois corporation, ("Successories" or the
"Company") is a direct mail catalog company, specialty retailer and wholesaler
that designs, assembles and markets a diverse range of motivational and
self-improvement products, many of which are the Company's own proprietary
designs. The Company's products include distinctive lines of wall decor, desktop
accessories, books, personalized gifts and awards, greeting cards and mugs. In
addition, the Company sells other motivational products supplied by third
parties. Company personnel create proprietary art work and designs that can be
used in conjunction with a wide variety of products. The Company will also
customize its products to fulfill customers' special needs.
The Company has a wide range of customers, including Fortune 500 companies,
mid-sized and small businesses, corporate management personnel, athletic and
educational organizations, and retail customers. The Company's products are
marketed primarily under its SUCCESSORIES trade name through direct marketing
(catalog, electronic commerce and telemarketing), retail sales (Company-owned
stores), sales to franchisees, and wholesale distribution.
The operating subsidiaries (the "Subsidiaries") of the Company commenced
operations in 1985 and their original owners included certain executive officers
and directors of the Company. In October 1990, Primus Development Group II Ltd.
("Primus") acquired in excess of 90% of the stock of the Subsidiaries through a
share exchange. The Company was formed in October 1990 as a wholly-owned
subsidiary of Primus and, in February 1992, Primus merged into the Company. In
March 1991 and April 1993, the Company acquired the remaining outstanding stock
of the Subsidiaries through share exchanges.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES and franchised retail
stores. As a result, the Company began plans to divest its golf catalog
business, to convert its company-owned retail stores to franchise
owner-operators and to reduce the scope of its wholesale business. See Note 11
on F-20 for further information on the business segments.
PRODUCTS
A majority of the Company's sales are derived from proprietary products that
have either been internally developed or designed, or individually customized.
All products are designed to have a positive motivational or self-improvement
theme that can be used by businesses to reinforce basic business goals such as
customer service, attitude and teamwork, and to recognize achievement and good
performance. The Company's products also appeal to many individuals for both
personal and professional motivation and for gifts.
The Company's proprietary wall decor product line includes dramatic
photography and other art developed, designed or customized in-house, and
printed on high-quality coated paper stock with various motivational captions.
Company designers give each grouping of wall decor products a unique, uniform
overall appearance, consistent visual themes, a range of predominant colors, and
distinctive border design and lettering, thereby providing each grouping with a
distinctive trade dress. The prints within each product grouping are also
similar in size. Framed art comes either with an aluminum frame with an
electroplated high-gloss black finish or a wood frame. High-quality tempered
glass is used for safety reasons and to protect against damage. The Company's
wall decor includes framed and unframed lithographs in various sizes ranging
from 16-inch by 20-inch to 24-inch by 30-inch. The Company's merchandise is
categorized into the product "groupings" that convey a specific theme and trade
dress.
2
The Company markets smaller versions (5-inch by 7-inch to 6-inch by 12-inch)
of its wall decor as well as other products designed to be placed on desktops
and countertops. In addition, mini-sized framed lithographs and mouse pads are
marketed. All desktop products contain motivational words and/or images similar
to those used for wall decor.
All books sold by the Company are specifically selected for their
motivational or inspirational content and include those published by the Company
as well as by third parties. The Company markets collections of motivational or
inspirational quotations and educational books for sales, customer service and
human resource professionals.
The Company offers a wide variety of customized products to its customers.
In-house custom capabilities include hot-stamping, screen-printing, and
engraving for logos and personalized messages. Etched brass and crystal products
are also available. Some of the products with customized features include
employee awards, promotional items and corporate gifts.
While retail stores typically carry many of the Company's proprietary
products, they also carry a variety of products purchased from outside vendors.
Although the major product category is wall and desk decor, the Company also
sells pens, clocks, books, planners, mugs, and other related products.
The Company tries to expand its product line by offering new items with each
new catalog version and by creating new product lines that are distinctive in
appearance from existing lines.
SALES AND MARKETING
The Company generates revenue through direct marketing, Company-owned retail
stores, franchise stores, wholesale distribution, list rental and licensing
agreements. Customers are categorized as follows:
- corporate buyers including executives, sales managers, human resource
managers and production managers of larger corporations,
- entrepreneurial buyers including small business owners, home office
businesses, sales professionals, and,
- consumers who are primarily purchasing the Company's products for
themselves or as a gift for the end user.
The Company believes that the optimal way to reach its diverse customer base
is to market its products through several distribution channels. In addition,
the Company believes that its different distribution channels provide numerous
benefits in cross-marketing. For example, retail stores allow potential
customers to view, first-hand, the quality of the product offerings that may
lead to future catalog sales.
The Company's revenue base is comprised of a wide range of customers
including Fortune 500 companies, mid-sized and small businesses, corporate
management personnel, athletic and educational organizations, and retail
customers. No individual customer accounted for more than 10% of the Company's
net sales during the fiscal year ended January 29, 2000.
The Company emphasizes customer service to achieve its goal of producing a
high level of customer satisfaction. All merchandise sold to the Company's
direct marketing and retail customers may be returned for any reason.
DIRECT MARKETING
Through the use of its catalogs, the Company targets sales managers,
executives of businesses, meeting planners, human resource managers and
corporate training managers who have purchased or
3
shown a willingness to purchase the Company's products in the past. These
customers use the Company's products to reinforce important work themes, to
motivate and recognize employees, and as gifts at meetings and conventions. In
addition, the Company is constantly prospecting for new customers by mailing its
catalogs to prospective customers who have favorable demographic profiles or
purchasing patterns. The Company maintains a large proprietary in-house
database. Building on this foundation, the Company maintains an ongoing
prospecting effort by testing various mailing lists and evaluating the
recipient's responsiveness to the Company's product offerings. A group of
corporate sales representatives handle larger corporate accounts through
telemarketing.
The Company's SUCCESSORIES catalog features the entire line of proprietary
products and some third-party products. The two types of catalogs currently
being mailed are a 56-page version mailed to existing customers and catalog
requesters, and a 40-page version mailed to individuals on rented lists with the
objective to acquire them as new customers. When the prospective customer makes
the initial purchase they are subsequently sent a 56-page catalog using
selection criteria based on purchase history. During the fiscal year ended
January 29, 2000, the Company mailed approximately 14.5 million SUCCESSORIES
catalogs.
In December 1999, the Company re-launched its interactive Internet website,
WWW.SUCCESSORIES.COM, which featured increased product offering and enhanced
navigational performance. Visitors to the website are also able to view product
offerings and place orders for products featured in the Company's catalogs.
Customer interest in the website has steadily increased. For example, Internet
orders during fiscal 1999 increased by approximately 319% in comparison to
fiscal 1998. The Company believes the Internet offers a significant marketing
and sales opportunity.
In January 1999, the Company introduced a recognition awards catalog
offering a wide range of proprietary awards and gifts that can be engraved or
personalized. During the fiscal year ended January 29, 2000, the Company mailed
approximately 0.5 million SUCCESSORIES custom catalogs.
In October 1996, the Company acquired the stock of British Links Golf
Classics, Inc., a catalog company specializing in golf-related wall decor, gifts
and other collectibles. In addition in November 1997, the Company executed a
license agreement with the New York Times Magazine Group, Inc. in connection
with the development of THE GOLF COMPANY FROM GOLF DIGEST catalog. In
September 1999, the Company terminated its agreement with the New York Times
Magazine Group, Inc. as a result of its strategic plan to divest its golf
catalog business. During the fiscal year ended January 29, 2000, the Company
mailed approximately 0.7 million golf catalogs under the British Links and THE
GOLF COMPANY FROM GOLF DIGEST names.
RETAIL
The Company-owned retail locations consist of stores and temporary locations
primarily located in shopping malls. The Company's stores were introduced in
early 1991. As of January 29, 2000, the Company owned a total of 25 retail
locations, including 23 stores and 2 temporary locations. The following table
shows the number of Company-owned retail locations that were opened, closed,
converted to franchise, and in operation for each of the last three fiscal
years.
IN OPERATION
CONVERTED TO AT END OF
FISCAL YEAR ENDED OPENED CLOSED FRANCHISE FISCAL YEAR
- ----------------- -------- -------- ------------ ------------
January 31, 1998...................... 3 11 -- 43
January 30, 1999...................... 7 8 6 36
January 29, 2000...................... 1 9 3 25
4
As of January 29, 2000, the Company's retail locations are located in Canada
and the following states:
Arizona Massachusetts Pennsylvania
California Michigan Texas
Florida Minnesota Virginia
Maryland New York
WHOLESALE
The Company sells products to a number of wholesale customers. Wholesale
customers include other direct marketing distributors and distributors who have
acquired distribution rights for the Company's products in other countries.
The Company licenses some of its proprietary images to third parties for use
in their products for which the Company receives a royalty payment. These third
parties generally market office supply products such as pens, notebooks,
calendars and note cubes either through retail stores or through direct
marketing catalog sales.
FRANCHISE
As of January 29, 2000, there were 58 franchised retail stores. The
following table shows the number of franchised stores that were opened, closed
and in operation for each of the last three fiscal years.
IN OPERATION
AT END OF
FISCAL YEAR ENDED OPENED CLOSED FISCAL YEAR
- ----------------- -------- -------- ------------
January 31, 1998................................. 4 10 43
January 30, 1999................................. 13 7 49
January 29, 2000................................. 15 6 58
Product sales to franchisees are typically made at a discount to retail or
at product cost plus a certain percentage.
All franchisees are required to comply with Company-established operational
policies and procedures relating to, among other things, quality of service,
training, design and decor of stores, and trademark usage. The Company retains
the right to receive an assignment of any leasehold interest and gain possession
of the store if the franchisee fails to comply with the Company's operational
policies and procedures or upon expiration of the franchise agreement.
The Company provides new franchisees with training at both the Company's
headquarters and at Company-owned retail locations which focuses on the various
aspects of store management, including marketing fundamentals, financial
controls and product knowledge. In addition, the Company provides ongoing
employee training to franchisees and their managers, as well as its own
managers.
The Company reviews all proposed franchise store locations and reserves the
right to review the lease terms. Various factors are considered in evaluating
sites, including trade area demographics, availability and cost of space,
location of competitors, and total retail sales in a given enclosed shopping
area.
FRANCHISE AGREEMENT
The Company attracts qualified franchise owners with a low initial franchise
fee. The franchise fee for the first store is $35,000 and $25,000 for each
additional store, payable in full upon execution of a franchise agreement.
Franchisees are responsible for the costs of leasehold improvements, inventory,
furniture, fixtures, decor and certain other items including initial working
capital. The franchisee purchases for resale Company manufactured products or
products from others that are Company-approved. Due to the
5
proprietary nature of most of the Company's products, the Company is the only
available source for many products sold by franchisees.
Franchisees currently pay a monthly royalty to the Company of 2% of
franchise gross sales. Franchisees are further required to spend between $2,000
to $3,000 on grand opening advertising, followed by 3% of monthly gross sales
for local advertising and promotion.
The franchise agreements have an initial term of five years with a renewal
option for three additional successive terms of five years each. The agreements
also provide the Company with the right to purchase the franchisee's store
assets upon termination or expiration of the franchise agreement, and a right of
first refusal if the franchise is to be sold. The franchisee must obtain the
Company's approval in all instances prior to the sale of a franchised store. The
franchise agreement is granted for the operation of a single retail store at a
specified location. The Company reserves certain rights within close proximity
to franchised retail stores to sell products through channels of distribution
distinct from that of a franchised retail business.
STRATEGIC CHANGES
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES and franchised retail
stores.
As a result the Company began plans, which were in progress as of
January 29, 2000, to divest its golf catalog business, to reduce the scope of
its wholesale business, and to convert its company-owned retail stores to
franchise owner-operators. The Company has yet to sell the golf catalog
business. The Company has hired a consultant with experience in marketing
franchises to assist with the conversion of the Company-owned retail stores.
Since September 3, 1998, the Company has converted nine of its Company-owned
retail stores to franchised stores.
MANUFACTURING, ORDER FULFILLMENT AND DISTRIBUTION
The Company's manufacturing operations consist primarily of framing,
product-engraving, hot-stamping and silk screening. The Company mounts and
assembles its framed wall and desk decor in-house and has developed a special
packaging system designed to reduce the risk of breakage in shipping.
Generally, the Company's catalog customers may choose to have their orders
sent via ground shipment (7 - 10 days), economy (4 - 6 days), express
(2 - 3 days) or next day shipment. The Company's manufacturing operations and
order fulfillment capabilities enable it to accommodate last-minute orders for a
variety of products, and to produce samples of products for existing and
potential customers. These capabilities further enable the Company to produce
and test products before inclusion in the distribution channels.
The Company depends upon outside suppliers for many items such as mugs,
stationery and components for framing, all of which are readily available from a
number of suppliers. In addition, the Company outsources its film work and
printing, although its creative staff works closely with outside film houses and
printers to assure that all work is done to the Company's specifications and
satisfaction.
SEASONALITY
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality."
6
COMPETITION
The industry supplying motivational, self-improvement and custom awards is
highly competitive and fragmented. The Company competes principally on the basis
of product exclusivity, selection, quality, name recognition and price of its
products. The Company believes that the proprietary products it offers provide a
competitive advantage in its merchandising offering.
The Company competes with other franchisors for qualified franchisees. The
Company's strategy is to attract franchisees with successful business and
management backgrounds. Franchisees are not required to have experience in the
retail industry or with the types of products offered by the Company.
TRADEMARKS AND SERVICE MARKS
The Company owns a federal registration for the service mark "Successories"
in Class 42 on the Principal Register of the United States Patent and Trademark
Office ("PTO"). The Company believes the use of the service mark SUCCESSORIES is
important in establishing and maintaining its reputation and is committed to
protecting this service mark by vigorously challenging any unauthorized use.
Although many of the quotations and other art work used by the Company are
in the public domain and are not individually protectable under copyright and
trademark laws, the Company continually endeavors to protect its products
through exclusive licensing relationships with the owners or subjects of various
photographs by giving the products a distinctive trade dress.
EMPLOYEES
As of January 29, 2000, the Company employed 345 persons, of whom 231 were
employed full time. Of this total, 194 were employed at the corporate
headquarters in marketing, manufacturing, order fulfillment and administrative
capacities, and 151 were field personnel, store managers or store personnel. The
Company is not a party to any collective bargaining agreements and has not
experienced a strike or work stoppage. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company leases its corporate office and manufacturing/warehouse facility
in Aurora, Illinois, under the terms of a lease agreement which expires in
July 2009. The lease is for approximately 20,000 square feet of office space and
110,000 square feet of manufacturing/warehouse space.
The Company leases all 25 Company-owned stores from various property owners
under terms typical in an enclosed mall or strip shopping center. Lease terms
generally vary from five to ten years for stores, and six months to one year for
temporary store locations. None of the Company's store leases are individually
material to the operations of the Company.
ITEM 3. LEGAL PROCEEDINGS
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company,
filed a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortuous interference of contract and violation of the Wisconsin Fair Dealership
Act. In support thereof, Wascher alleges that the Company has not followed its
agreement with Wascher or observed reasonable commercial standards and good
business practices. Wascher alleges and seeks an award in an amount in excess of
$250,000 plus costs, disbursements and attorney's fees, an award of both treble
and punitive damages, and such other relief deemed just and equitable.
7
The hearing dates for the Wascher matter were originally scheduled in
January 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
Except as noted above, there are no other material pending legal proceedings
against the Company. The Company is, however, involved in routine litigation
arising in the ordinary course of its business and, while the results of the
proceedings cannot be predicted with certainty, the Company believes that the
final outcome of any such matters will not have a materially adverse effect on
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ---- -------- ------------------------------------------------------------
Arnold M. Anderson.. 55 Director since October 1999; prior thereto, Director and
Chairman of the Board since November 1998; prior thereto,
Chief Executive Officer, Chairman of the Board and Director
since June 1998; prior thereto, Chairman of the Board and
Director since May 1997; prior thereto, Chief Executive
Officer, Chairman of the Board and Director since June 1995;
prior thereto, Chief Executive Officer, President, Chairman
of the Board and Director for the Company and its
predecessor (Primus) since October 1990; prior thereto,
Chairman and President of the Subsidiaries.
Gary J. Rovansek.... 57 President, Chief Executive Officer, Chief Operating Officer
and Director since October 1999; prior thereto, President
and Chief Operating Officer since November 1998; prior
thereto, President and Director of J.C. Whitney & Co.(direct
marketer of after-market automotive products) since February
1994; prior thereto, President of the Horticultural Division
of Foster & Gallagher, Inc. (direct marketer of horticulture
products) since 1993; prior thereto, President of Reliable
Corporation (direct marketer of office products) since 1988.
John C. Carroll..... 51 Senior Vice President and Chief Financial Officer since
April 2000; prior thereto, Vice President Finance and
Operations of D&B Auto Radio, Inc. (remanufacturer and
distributor of after-market automotive electronics) since
November 1993; prior thereto, Chief Operating Officer and
Treasurer of Universal Financial Products (distributor of
computer equipment) since February 1989.
Michael H. McKee.... 46 Senior Vice President and Creative Director since October
1999; prior thereto, Senior Vice President and Creative
Director, and Director since October 1990; prior thereto,
Creative Director of Product Development and Advertising for
the Subsidiaries.
John F. Halpin...... 46 Senior Vice President, Direct Marketing Division since
September 1996; prior thereto, Vice President of Marketing
for Foster & Gallagher, Inc. (direct marketer of
horticulture products) since January 1985.
Kenneth R. Taylor... 48 Vice President, Operations since September 1998; prior
thereto, Director of Manufacturing since May 1997; prior
thereto, Director of Operations for Echo Star, Inc.
(telecommunications distributor) since 1996; prior thereto,
Director of Quality for Josten, Inc. (award recognition
distributor) since 1992.
Gregory J. Nowak.... 39 Vice President, General Counsel and Corporate Secretary
since October 1998; prior thereto, Vice President and
Associate Counsel of Scudder Kemper Investments, Inc.
(investment manager) since 1995; prior thereto, Counsel to
Kemper Corporation (financial services) since 1992.
James W. Brintnall... 42 Senior Vice President, Marketing and Merchandising since
March 2000; prior thereto, Vice President of Brand Strategy
and Product Development since May 1999; prior thereto, Vice
President of Research and Development since June 1994.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "SCES." The following table sets forth the high and low bid prices for
the Company's common stock as reported by the Nasdaq National Market for the
applicable periods shown.
HIGH LOW
-------- --------
Fiscal Year Ended January 30, 1999
First Quarter............................................. $6.625 $5.375
Second Quarter............................................ 5.500 3.625
Third Quarter............................................. 4.000 1.375
Fourth Quarter............................................ 4.125 1.375
Fiscal Year Ended January 29, 2000
First Quarter............................................. $3.125 $2.000
Second Quarter............................................ 3.375 2.125
Third Quarter............................................. 3.000 2.000
Fourth Quarter............................................ 3.000 1.750
As of March 31, 2000, the number of holders of record of the Company's
common stock was approximately 586, and there were approximately 600 beneficial
owners of the Company's common stock.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its earnings to finance future
growth and therefore has no present intention of paying cash dividends on its
common stock in the foreseeable future. Under the Company's current credit
facility, with the Provident Bank, the payment of cash dividends by the Company
is prohibited.
10
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data for the Company as
of and for each of the last five fiscal periods. Certain prior year amounts have
been reclassified to conform with the current year presentation.
NINE
FISCAL YEAR ENDED MONTHS
----------------------------------------------------- ENDED
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net product sales...................... $ 51,702 $ 52,864 $ 56,821 $ 56,032 $ 35,484
Income (loss) from operations.......... $ 467 $ (5,777) $ 2,014 $ (697) $ 191
(Loss) income before income taxes...... $ (1,067) $ (7,276) $ 141 $ (2,347) $ (688)
Income tax expense (benefit)........... $ 60 $ 60 $ 54 $ (2,609) $ (1,388)
Net (loss) income...................... $ (1,127) $ (7,336) $ 87 $ 262 $ 700
Preferred stock dividends and
accretion............................ $ (101) $ -- $ (741) $ (1,126) $ --
(Loss) income available to common
stockholders......................... $ (1,228) $ (7,336) $ (654) $ (864) $ 700
(Loss) earnings per share:
Basic................................ $ (.18) $ (1.08) $ (0.10) $ (0.16) $ 0.14
Diluted.............................. $ (.18) $ (1.08) $ (0.10) $ (0.16) $ 0.13
Weighted-average number of common
shares outstanding................... 6,927,668 6,768,929 6,283,662 5,321,179 5,144,894
BALANCE SHEET DATA:
Total assets........................... $ 29,749 $ 34,700 $ 40,581 $ 33,853 $ 32,166
Total stockholder's equity............. $ 17,543 $ 15,373 $ 22,434 $ 16,408 $ 13,034
Long-term debt......................... $ 3,374 $ 5,049 $ 6,561 $ 4,094 $ 8,528
Convertible preferred stock............ $ 6 $ -- $ -- $ -- $ --
Redeemable preferred stock............. $ -- $ -- $ -- $ 5,472 $ --
CASH FLOW DATA:
Cash flow (used in) provided by
operations........................... $ 1,426 $ 2,712 $ (633) $ (1,088) $ (74)
Effective May 1, 1995, the Company changed its financial reporting year from
a fiscal year ending on April 30 to a fiscal year ending on the Saturday closest
to January 31. The period ended February 3, 1996 was a nine month period. The
changes were made to conform with retail industry reporting practices.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Report.
Successories is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of motivational
and self-improvement products, many of which are the Company's own proprietary
designs. The Company's products include distinctive lines of wall decor, desktop
accessories, books, personalized gifts and awards, greeting cards and mugs. In
addition, the Company sells other motivational products supplied by third
parties. In-house designers create proprietary art work and designs that can be
used in conjunction with a wide variety of products. The Company will also
customize products to fulfill customers' special needs.
The Company's products are marketed primarily under its SUCCESSORIES trade
name through direct marketing (catalog, electronic commerce and telemarketing),
retail channel (Company-owned stores),
11
sales to franchisees and wholesale distribution. In October 1996, the Company
acquired British Links Golf Classics, Inc., a catalog company selling
golf-related gifts, art, wall decor and other collectibles. In November 1997,
the Company executed a license agreement with the New York Times Company
Magazine Group, Inc. to use the names GOLF DIGEST, THE GOLF COMPANY, and THE
GOLF COMPANY FROM GOLF DIGEST in connection with the development of retail
locations and a direct mail catalog featuring golf-related wall decor, gifts,
and other collectibles. In September 1999, the Company terminated its agreement
with the New York Times Magazine Group, Inc. as a result of its strategic plan
to divest its golf catalog business.
Although the Company utilizes multiple distribution channels for its
products, the Company's products have similar purposes and uses in each channel
of distribution. The profitability varies among products and distribution
channels. The Company utilizes its facilities interchangeably for each
distribution channel. Furthermore, the marketing channels are directed at a
single customer base located primarily in the United States.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES and franchised retail
stores. As a result, the Company began plans, which were in progress as of
January 29, 2000, to divest its golf catalog business, to reduce the scope of
its wholesale business, and to convert its company-owned retail stores to
franchise owner-operators. The Company has hired a consultant with experience in
marketing franchises to assist with the conversion of the Company-owned retail
stores. Since September 3, 1998, the Company has converted nine of its
Company-owned retail stores to franchised stores. The Company has yet to sell
the golf catalog business.
For the fiscal years ended January 29, 2000, January 30, 1999 and
January 31, 1998, net product sales for the various distribution channels, as a
percentage of total net product sales, were as follows:
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Direct marketing--Successories................... 56% 49% 42%
Direct marketing--Golf........................... 3% 6% 6%
Retail Company-owned stores...................... 26% 31% 31%
Wholesale........................................ 2% 3% 11%
Sales to franchisees............................. 13% 11% 10%
The gross profit margins for retail sales attributable to Company-owned
stores are slightly lower than for direct marketing due to more non-proprietary
products being sold in the retail stores. The gross profit margin for wholesale
distribution sales, including sales to franchisees, is lower than other channels
since these sales are generally made at a significant discount from retail
price.
12
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the last three
fiscal years and the change from the previous year, as taken from the Company's
consolidated statements of operations. The Company's fiscal year 1999 consisted
of the 52 weeks ended January 29, 2000. The Company's fiscal year 1998 consisted
of the 52 weeks ended January 30, 1999. The Company's fiscal year 1997 consisted
of the 52 weeks ended January 31, 1998.
FISCAL YEARS ENDED
-----------------------------------------
JANUARY 29, 2000 JANUARY 30, 1999 INCREASE (DECREASE)
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net product sales........................... $51,702 100.0 $52,864 100.0 $(1,162) (2.2)
Cost of goods sold.......................... 23,536 45.5 24,728 46.8 (1,192) (4.8)
------- ----- ------- ----- -------
Gross profit on product sales............... 28,166 54.5 28,136 53.2 30 0.1
Fees, royalties and other income............ 1,175 2.3 1,624 3.1 (449) (27.6)
------- ----- ------- ----- -------
Gross margin................................ 29,341 56.8 29,760 56.3 (419) (1.4)
Operating expenses.......................... 28,874 55.9 34,235 64.8 (5,361) (15.7)
Asset impairment charge..................... -- -- 1,302 2.5 (1,302) (100.0)
------- ----- ------- ----- -------
Income (loss) from operations............... 467 0.9 (5,777) (11.0) 6,244 108.1
Interest and other expenses................. 1,534 3.0 1,499 2.8 35 2.3
------- ----- ------- ----- -------
(Loss) income before income taxes........... (1,067) (2.1) (7,276) (13.8) 6,209 85.3
Income tax expense.......................... 60 0.1 60 0.1 -- --
------- ----- ------- ----- -------
Net (loss) income........................... $(1,127) (2.2) $(7,336) (13.9) $ 6,209 84.6
======= ===== ======= ===== =======
FISCAL YEARS ENDED
-----------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998 INCREASE (DECREASE)
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
Net product sales......................... $52,864 100.0 $56,821 100.0 $(3,957) (7.0)
Cost of goods sold........................ 24,728 46.8 25,542 45.0 (814) (3.2)
------- ----- ------- ----- -------
Gross profit on product sales............. 28,136 53.2 31,279 55.0 (3,143) (10.0)
Fees, royalties and other income.......... 1,624 3.1 1,824 3.2 (200) (11.0)
------- ----- ------- ----- -------
Gross margin.............................. 29,760 56.3 33,103 58.2 (3,343) (10.1)
Operating expenses........................ 34,235 64.8 31,089 54.7 3,146 10.1
Asset impairment charge................... 1,302 2.5 -- -- 1,302 N/A
------- ----- ------- ----- -------
(Loss) income from operations............. (5,777) (11.0) 2,014 3.5 (7,791) (386.8)
Interest and other expenses............... 1,499 2.8 1,873 3.2 (374) (20.0)
------- ----- ------- ----- -------
(Loss) income before income taxes......... (7,276) (13.8) 141 0.3 (7,417) (5,260.3)
Income tax expense........................ 60 0.1 54 0.1 6 11.1
------- ----- ------- ----- -------
Net (loss) income......................... $(7,336) (13.9) $ 87 0.2 $(7,423) (8,532.2)
======= ===== ======= ===== =======
YEAR ENDED JANUARY 29, 2000 (FISCAL 1999), COMPARED TO YEAR ENDED
JANUARY 30, 1999
(FISCAL 1998)
Net product sales were $51,702,000 for the year ended January 29, 2000,
compared to $52,864,000 for the corresponding year ended January 30, 1999. The
$1,162,000, or 2.2% decrease in sales was comprised of wholesale sales of
$934,000, or 51.5%, retail Company-owned store sales of $2,924,000, or 17.9%,
and
13
direct marketing--golf sales of $1,887,000, or 56.0%, offset by an increase in
direct marketing--Successories sales of $3,161,000, or 12.2%, and franchise
sales of $1,422,000 or 25.3%.
As a result of the Company implementing its strategy to focus on its two
most profitable distribution channels: direct marketing SUCCESSORIES and
franchise sales, and to make plans to exit from its other channels, total
Company net product sales decreased in fiscal 1999 by 2.2% compared to fiscal
1998, as planned. Net product sales from the two core channels, direct marketing
SUCCESSORIES and franchise sales, reflected a strong growth of 14.6% in fiscal
1999, compared to fiscal 1998. The increase in direct marketing SUCCESSORIES
sales can be attributed to planned increases in circulation of catalogs,
introduction of the clearance catalog, and increase in page count of the
catalogs in fiscal 1999. The increase in franchise sales was due to the new
product offerings, increase in franchise stores (fiscal 1999--58 stores and
fiscal 1998--49 stores), and higher sales volume in fiscal 1999. Sales in
channels being phased out, direct marketing golf, retail Company-owned stores
and wholesale, decreased by 26.7% in fiscal 1999 in comparison to fiscal 1998.
The decrease in direct marketing golf sales was due to planned reductions in
circulation of the golf catalogs. The overall decrease in retail Company-owned
store sales was due to fewer stores in operation in the current year compared to
the prior year (fiscal 1999--25 stores and fiscal 1998--36 stores). The
comparable same store sales for the retail Company-owned stores in fiscal 1999
were flat compared to fiscal 1998. The decrease in wholesale channel sales can
be attributed to planned reduction in the scope of business in fiscal 1999.
Gross profit on product sales in fiscal 1999 of $28,166,000 was comparable
to $28,136,000 in fiscal 1998, even though net product sales declined by
$1,162,000 in fiscal 1999. The improvement in gross profit on product sales can
be attributed to a higher gross profit, as a percentage of net product sales, in
fiscal 1999. The improvement in gross profit is primarily due to the change in
net product sales mix from the various distribution channels in fiscal 1999
compared to fiscal 1998, which impacted the overall gross profit as it varies
amongst the various channels, and improvement in gross profit due to the
decrease in promotional discounts. Gross profit on net product sales, as a
percentage of net sales, was 54.5% in fiscal 1999 versus 53.2% in fiscal 1998.
Operating expenses decreased in fiscal 1999 to $28,874,000 from $34,235,000
in fiscal 1998. The 15.7% decrease can be primarily attributed to a decrease in
expenses related to the Company's golf catalog business, due to fewer retail
Company-owned stores in operation, and a reduction in corporate and
administrative expenses as a result of focusing on the two core distribution
channels, offset by additional expenses of $961,000 incurred as a result of
planned retail store closings, exiting costs associated with the golf and Europe
catalog businesses, and exiting its wholesale activity with the office supply
companies.
During fiscal 1998, the Company recorded an asset impairment charge of
$1,302,000 related to goodwill associated with the acquisition of British Links
Golf Classics, Inc.
The net loss in fiscal 1999 of $1,127,000 versus the net loss of $7,336,000
in fiscal 1998 is primarily due to a decrease in operating expenses in fiscal
1999 and the asset impairment charge recognized in fiscal 1998. As a percentage
of net product sales, the net loss for fiscal 1999 was 2.2% versus 13.9% in
fiscal 1998.
YEAR ENDED JANUARY 30, 1999 (FISCAL 1998), COMPARED TO YEAR ENDED
JANUARY 31, 1998
(FISCAL 1997)
Net product sales were $52,864,000 for the year ended January 30, 1999,
compared to $56,821,000 for the corresponding year ended January 31, 1998. The
$3,957,000, or 7.0% decrease in sales was comprised of wholesale sales of
$4,361,000, or 70.6%, retail Company-owned store sales of $1,425,000, or 8.0%,
franchise sales of $94,000, or 1.7%, and direct marketing--golf sales of
$58,000, or 1.7%, offset by increase in direct marketing SUCCESSORIES sales of
$1,981,000, or 8.3%.
The 8.3% increase in direct marketing SUCCESSORIES sales was attributable to
improved response rates and marketing strategies associated with the Company's
core customer lists. In 1998, the Company began
14
to increase its direct marketing customer base through prospective catalog
mailings which also contributed to the sales increase. Retail Company-owned
store sales decreased by 8.0% due to fewer stores in operation in fiscal 1998,
offset by an increase in same-store sales of 3.3% as compared to the same twelve
months in the prior year. Wholesale sales decreased by 70.6% primarily due to
discontinuing the alliance with Waldenbooks.
Gross margin, as a percent of net product sales, was 56.3% for fiscal 1998,
compared to 58.2% for fiscal 1997. The decrease in gross margin in fiscal 1998
was due to planned product promotions pursuant to market testing in the direct
marketing and retail distribution channels, offset partially by an increase in
overall gross margin due to a decrease in wholesale sales that have a lower
gross margin.
Operating expenses were $34,235,000 for fiscal 1998, compared to $31,089,000
for fiscal 1997. Operating expenses for fiscal 1998 included additional charges
of $1,108,000, which were comprised of costs associated with reduction of
corporate personnel of $350,000, provision for bad debt relating to receivables
from the Company's Australian licensee of $400,000, retail store-related
expenses of $283,000, and expected real estate costs for the closing of the
Canadian office of $75,000. Advertising expense increased to $9,561,000 for
fiscal 1998 as compared to $9,097,000 for fiscal 1997. Also, depreciation and
amortization expense increased to $2,913,000 for fiscal 1998 as compared to
$2,516,000 for fiscal 1997. Additional factors contributing to the increase
include start-up expenses for European and golf catalog markets, expenses
related to post-installation improvements in the Company's new information
systems and expansion of the Company's merchandising and product development
departments.
During fiscal 1998, the Company recorded an asset impairment charge of
$1,302,000 related to goodwill associated with British Links Golf
Classics, Inc.
The net loss of $7,336,000 for fiscal 1998 was less than the net income of
$87,000 for fiscal 1997, primarily due to lower wholesale distribution sales,
lower gross margin, additional operating expenses and an asset impairment charge
in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements are for working capital, capital
expenditures and debt service. The Company expects to rely on cash generated
from its operations, supplemented by borrowings available on the revolving
credit facility, to fund its cash requirements.
Operating activities provided cash of $1,426,000 and $2,712,000 for the
years ended January 29, 2000 (fiscal 1999), and January 30, 1999 (fiscal 1998),
and used cash of $633,000 for the year ended January 31, 1998 (fiscal 1997). In
the current fiscal year 1999, the decrease in inventory and accounts payable can
be attributed to management's planned efforts to reduce inventory. The
improvement in the cash flows from operating activities in fiscal 1998 compared
to fiscal 1997, was primarily attributable to a decrease in accounts and notes
receivable, and an increase in accounts payable and accrued liabilities, offset
by the net loss. The decrease in accounts and notes receivable in fiscal 1998
was primarily due to improved collections in accounts receivable after a delay
in billings in the fourth quarter of fiscal 1997 due to a system conversion.
Investing activities used cash of $431,000 for fiscal 1999, compared to
$2,078,000 for fiscal 1998 and $4,221,000 for fiscal 1997. The principal use of
cash was capital expenditures. In the current fiscal year 1999, the Company
expended funds primarily for computer equipment and related costs to address
year 2000 compliance, and upgrading the Company's Internet website. In fiscal
1998 and fiscal 1997, the Company expended funds to open new Company-owned
stores, and upgrade its manufacturing/warehouse and computer equipment to
address year 2000 compliance and business needs. Also, the Company installed new
point-of-sale computer systems in all of its retail locations in fiscal 1998.
The Company's credit facility limited capital expenditures to $4.6 million for
fiscal 1997, $2 million for fiscal 1998, and
15
$1 million for each fiscal year thereafter. The capital expenditures in fiscal
1998 exceeded the above mentioned credit facility limit and the Company obtained
a waiver from the bank.
Financing activities used cash of $1,371,000 and $770,000 for fiscal 1999
and 1998 respectively, and provided cash of $5,432,000 for fiscal 1997.
Scheduled debt repayments on term notes and capital leases, and net repayments
on the revolving credit facility were the principal uses of cash. In the current
fiscal year 1999, the Company received $2,745,000 in proceeds from the sale of
convertible preferred stock. Pursuant to the terms of the bank credit agreement,
proceeds of $2,745,000 from the sale of preferred stock were used to make a
prepayment on the term loan in the amount of $1,000,000 and $1,745,000 was
applied against the revolving credit facility. On June 20, 1997 the Company
entered into a new credit facility with a bank. Borrowings on the new facility
were the principal financing source of cash in fiscal 1997. A portion of the
funds from the new credit facility were used to payoff existing debt and redeem
a portion of the Series B convertible preferred stock in fiscal 1997.
On June 20, 1997, the Company entered into a credit facility agreement with
The Provident Bank (the "Bank"). Per the agreement, as amended most recently on
April 6, 2000, the facility is comprised of a $7.5 million term loan and a
revolving credit loan. The revolving credit loan provides for maximum borrowings
of $9 million through May 1, 2000 and for each succeeding July 1 through
December 31; the maximum borrowings at all other times is $6 million. Borrowings
under the revolving credit loan are limited to 85% of eligible receivables plus
57% of eligible inventory, as defined, provided that from February through April
eligible inventory is limited to $5 million through the year 2000 and
$3 million in years thereafter. A commitment fee of 0.5% is payable on the daily
unused amount of the maximum revolving credit commitment. The facility expires
in June 2003, and borrowings under the facility are secured by substantially all
the assets of the Company. The interest rates on the term loan and revolving
credit loan borrowings generally fluctuate based on the margin ratio, as
defined, from a minimum of prime plus 0.50% to a maximum of prime plus 3.00% on
the term loan, and a minimum of prime to a maximum of prime plus 3.00% on the
revolving credit loan. Interest is payable monthly. The interest rate on the
term loan and revolving credit loan was 11.50% at January 29, 2000. The term
loan is payable in quarterly installments of $312,500 through June 1, 2000, and
$375,000 thereafter. Prepayments on the loans are required in certain cases
including, among others, equity offerings and asset dispositions. Further, the
Company must annually prepay the loans in an amount equal to 60% of excess cash
flow, as defined. As of January 29, 2000, available borrowings on the revolving
credit loan were $3,634,000. In July 1997, the agreement for the credit facility
was amended to include an additional $500,000 fixed rate loan. The loan bears
interest at 12% and is due in June 2003.
The credit facility also contains other provisions, including limits on
capital expenditures and additional indebtedness, and restrictions on the
Company's payment of cash dividends.
On April 6, 2000, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio and fixed charge coverage for the year ended January 29, 2000, and to
adjust certain other covenants and limitations prospectively. The amended
agreement requires that (i) adjusted EBITDA, as defined, which is based on a
rolling four quarter period, may not be less than $3,050,000 for the quarter
ended April 29, 2000, $3,200,000 for the quarter ended July 29, 2000, $3,350,000
for the quarter ended October 28, 2000, $3,480,000 for the year ended
February 3, 2001, and $3,600,000 for each quarter and year ended thereafter;
(ii) the interest coverage ratio, as defined, may not be less than 2.60 to 1.00
for the quarter ended April 29, 2000, 2.75 to 1.00 for the quarter ended
July 29, 2000, 3.15 to 1.00 for the quarter ended October 28, 2000 and 3.40 to
1.00 for each quarter and year ended thereafter; (iii) the fixed charge
coverage, as defined, not applicable for the quarter ended April 29, 2000, may
not be less than 1.25 to 1.00 for the quarter ended July 29, 2000, 1.15 to 1.00
for the quarter ended October 28, 2000, 1.10 to 1.00 for each quarter and year
ended through July 31, 2001, and 1.15 to 1.00 for each quarter and year ended
thereafter. Also, the limitation on the borrowings against eligible inventory,
as defined, of 57% was extended through the end of the credit agreement term.
16
The Company believes that internally generated funds and the credit facility
will be sufficient to meet its current operating needs, fund debt service and
anticipated capital expenditures for the next year.
YEAR 2000
The Company's internal systems have experienced no material Year 2000
compliance related problems. In addition, the Company is not aware of any
material Year 2000 related issues with any of its customers, suppliers or other
third parties with whom the Company has business relationships. The costs
associated with remediating the Company's non-compliant systems have not been
material. The Company does not believe at this time that potential Year 2000
issues will materially affect the Company's business, although no assurance can
be given that this will be the case.
SEASONALITY
The Company generally experiences peak sales in the fourth quarter of its
fiscal year (November through January) due to the holiday season. The effects of
seasonality are greater in the Company's retail operations than the other
segments of its business. Most operating expenses are incurred evenly throughout
the year, although some selling and administrative expenses are variable
depending on sales, and direct marketing catalog advertising expenses as a
percentage of sales are higher in the first calendar quarter. The Company's
quarterly operating results may also vary depending upon such factors as
converting Company-owned stores to franchise stores, catalog mailings, and the
timing of new product introductions and promotions by the Company. The Company's
cash requirements generally reach a seasonal peak in the second half of the year
to finance increased inventory levels needed to meet the third and fourth
quarter sales demand.
INFLATION
The Company does not believe that inflation has had a material impact on its
operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K report contains forward-looking statements which the Company
believes are within the meaning of Section 27A of the certain Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements may be deemed to include, among other things,
statements relating to anticipated financial performance, the management team,
management's long-term performance goals, plans to divest the Company's golf
catalog business and convert retail locations to franchised stores, programs to
reduce the Company's costs and enhance asset utilization, the Company's
generation of funds sufficient to meet its current operating needs and to fund
anticipated capital expenditures, realization of deferred tax assets, as well as
statements relating to the Company's operational and growth strategies. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be accurate, and actual results could differ materially from those
addressed in forward-looking statements contained in this Form 10-K report.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rate and foreign currency exchange rates, but does not hold any market
risk sensitive instruments for trading purposes. The Company uses both fixed and
variable rate debt, as described in Note 6 of the Notes to Consolidated
Financial Statements. Principal exposed to interest rate risk is limited to
$7,034,000 in variable rate debt. The impact of 1% change in interest rates on
the variable rate debt is approximately $70,000. The Company's exposure to
foreign currency exchange rate risk relates primarily to the financial position
and
17
results of operations in Canada and United Kingdom. The Company's exposure to
foreign currency exchange rate risk is difficult to estimate due to factors such
as balance sheet accounts, and the existing economic uncertainty and future
economic conditions in the international marketplace.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Financial Statement Schedules on
page F-1. Such Financial Statements and Schedules are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's Directors will be included under the
caption, "Election of Directors," in the Company's Proxy Statement for its 2000
Annual Meeting of shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after January 29, 2000, and is incorporated
herein by reference. Information regarding the Company's executive officers of
the Company is included under a separate caption in Part I hereof, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Executive Compensation will be included under the
caption, "Compensation and Other Transactions with Management," in the Company's
Proxy Statement for its 2000 Annual Meeting of shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after January 29,
2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the above will be included under the caption,
"Security Ownership," in the Company's Proxy Statement for its 2000 Annual
Meeting of shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after January 29, 2000, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above will be included under the caption,
"Compensation and Other Transactions with Management," in the Company's Proxy
Statement for its 2000 Annual Meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after January 29, 2000,
and is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. See Index to Financial Statements and Financial Statement Schedules
on page F-1.
2. See Index to Financial Statements and Financial Statement Schedules on
page F-1
3. See Index to Exhibits immediately following the Signature page.
(b) On November 4, 1999, the Company filed a current Report on Form 8-K
reporting on the completion of a $1,525,000 private placement by the
Company of preferred stock to a group of investors.
(c) See Index to Exhibits immediately following the Signature page.
(d) See Index to Financial Statements and Financial Statement Schedules on
page F-1.
20
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
--------
(1) Financial Statements:
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
(2) Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts.............. F-29
All other financial schedules called for under Regulation S-X are not
submitted because they are not applicable, or not required, or because the
required information is not material or is included in the consolidated
financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders of
Successories, Inc.
We have audited the accompanying consolidated balance sheets of
Successories, Inc. (an Illinois corporation) and subsidiaries as of January 29,
2000 and January 30, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended January 29, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Successories, Inc. and subsidiaries as of January 29, 2000 and January 30, 1999,
and the results of its operations and its cash flows for each of the three
fiscal years in the period ended January 29, 2000, in conformity with generally
accepted accounting principles in the United States.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The schedule on Page F-29 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the consolidated financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the consolidated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 24, 2000
(except with respect to the matters discussed in
Note 6, as to which the date is April 6, 2000)
F-2
SUCCESSORIES, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,239,000 $ 1,615,000
Accounts and notes receivable, net of allowance of
$549,000 and $660,000, respectively..................... 3,430,000 3,522,000
Inventories, net.......................................... 7,998,000 10,618,000
Prepaid catalog expenses.................................. 1,539,000 1,067,000
Other prepaid expenses.................................... 130,000 272,000
------------ ------------
Total current assets........................................ 14,336,000 17,094,000
Property and equipment, net................................. 7,933,000 9,899,000
Notes receivable............................................ 295,000 297,000
Deferred financing costs, net............................... 303,000 400,000
Deferred income taxes....................................... 5,199,000 5,199,000
Intangible and other assets, net............................ 1,683,000 1,811,000
------------ ------------
TOTAL ASSETS................................................ $ 29,749,000 $ 34,700,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,250,000 $ 6,035,000
Accounts payable.......................................... 3,789,000 6,447,000
Accrued expenses.......................................... 1,746,000 1,745,000
------------ ------------
Total current liabilities................................... 8,785,000 14,227,000
Long-term debt, net of current portion...................... 3,374,000 5,049,000
------------ ------------
Total liabilities........................................... 12,159,000 19,276,000
------------ ------------
Minority interests in subsidiaries.......................... 47,000 51,000
------------ ------------
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized, 503,092 of Series A and 101,667 of
Series B shares issued and outstanding as of January 29,
2000.................................................... 6,000 --
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,933,213 and 6,913,293 shares issued and
outstanding, respectively............................... 69,000 69,000
Common stock warrants..................................... 2,291,000 1,788,000
Notes receivable from stockholders........................ (165,000) (273,000)
Additional paid-in capital................................ 28,969,000 26,188,000
Accumulated deficit....................................... (13,563,000) (12,335,000)
Accumulated other comprehensive loss...................... (64,000) (64,000)
------------ ------------
Total stockholders' equity.................................. 17,543,000 15,373,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 29,749,000 $ 34,700,000
============ ============
The accompanying notes are an integral part of these statements.
F-3
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Net product sales................................ $51,702,000 $52,864,000 $56,821,000
Cost of goods sold............................... 23,536,000 24,728,000 25,542,000
----------- ----------- -----------
Gross profit on product sales.................... 28,166,000 28,136,000 31,279,000
Fees, royalties and other income................. 1,175,000 1,624,000 1,824,000
----------- ----------- -----------
Gross margin..................................... 29,341,000 29,760,000 33,103,000
Operating expenses............................... 28,874,000 34,235,000 31,089,000
Asset impairment charge.......................... -- 1,302,000 --
----------- ----------- -----------
Income (loss) from operations.................... 467,000 (5,777,000) 2,014,000
----------- ----------- -----------
Other (expense) income:
Interest income................................ 50,000 35,000 31,000
Minority interests in subsidiaries............. (218,000) (100,000) (269,000)
Interest expense............................... (1,451,000) (1,359,000) (1,561,000)
Other, net..................................... 85,000 (75,000) (74,000)
----------- ----------- -----------
Total other expense.............................. (1,534,000) (1,499,000) (1,873,000)
----------- ----------- -----------
(Loss) income before income taxes................ (1,067,000) (7,276,000) 141,000
Income tax expense............................... 60,000 60,000 54,000
----------- ----------- -----------
Net (loss) income................................ $(1,127,000) $(7,336,000) $ 87,000
=========== =========== ===========
Dividend to Preferred Stockholders............... $ 101,000 $ -- $ 741,000
=========== =========== ===========
Loss available to common stockholders............ $(1,228,000) $(7,336,000) $ (654,000)
=========== =========== ===========
Foreign currency translation adjustment.......... -- 9,000 (37,000)
=========== =========== ===========
Comprehensive (loss) income...................... $(1,127,000) $(7,327,000) $ 50,000
=========== =========== ===========
Loss per share:
Basic and Diluted.............................. $ (.18) $ (1.08) $ (.10)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE NOTES
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS
--------- -------- -------- -------- ----------- ------------ ------------
Balance at February 1,
1997.................... 5,703,459 $57,000 -- $-- $20,362,000 $ (4,345,000) $ --
Net income................ -- -- -- -- -- 87,000 --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- --
Stock warrants issuance
and revaluation......... -- -- -- -- -- -- --
Notes receivable.......... -- -- -- -- -- -- (273,000)
Preferred stock
transactions:
Preferred stock
dividends............. -- -- -- -- -- (153,000) --
Accretion of preferred
stock discount........ -- -- -- -- -- (588,000) --
Common stock transactions:
Sales of common
shares................ 44,451 1,000 -- -- 215,000 -- --
Conversion of Series B
preferred stock......... 1,010,667 10,000 -- -- 5,550,000 -- --
--------- ------- -------- ------- ----------- ------------ ---------
Balance at January 31,
1998.................... 6,758,577 $68,000 -- -- $26,127,000 $ (4,999,000) $(273,000)
Net loss.................. -- -- -- -- -- (7,336,000) --
Foreign currency
translation
adjustment.............. -- -- -- -- -- -- --
Stock warrants issuance
and revaluation......... -- -- -- -- -- -- --
Common stock transactions:
Sales of common shares
and exercise of stock
options............... 154,716 1,000 -- -- 61,000 -- --
--------- ------- -------- ------- ----------- ------------ ---------
Balance at January 30,
1999.................... 6,913,293 $69,000 -- -- $26,188,000 $(12,335,000) $(273,000)
Net loss.................. -- -- -- -- -- (1,127,000) --
Stock warrants issuance
and revaluation......... -- -- -- -- -- -- --
Notes receivable payments
and writeoffs........... -- -- -- -- -- -- 108,000
Common stock transactions:
Sales of common shares
and exercise of stock
options............... 19,920 -- -- -- 42,000 -- --
Preferred stock
transactions:
Sale of Series A
shares................ -- -- 503,092 5,000 1,215,000 -- --
Sale of Series B
shares................ -- -- 101,667 1,000 1,524,000 -- --
Preferred stock
dividends............. -- -- -- (101,000) --
--------- ------- -------- ------- ----------- ------------ ---------
Balance at January 29,
2000.................... 6,933,213 $69,000 604,759 $6,000 $28,969,000 $(13,563,000) $(165,000)
========= ======= ======== ======= =========== ============ =========
The accompanying notes are an integral part of these statements.
F-5
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER COMMON TOTAL
COMPREHENSIVE STOCK STOCKHOLDERS'
LOSS WARRANTS EQUITY
------------- ---------- -------------
Balance at February 1, 1997............................ $(36,000) $ 370,000 $16,408,000
Net income............................................. -- -- 87,000
Foreign currency translation adjustment................ (37,000) -- (37,000)
Stock warrants issuance and revaluation................ -- 1,214,000 1,214,000
Notes receivable....................................... -- -- (273,000)
Preferred stock transactions:
Preferred stock dividends............................ -- -- (153,000)
Accretion of preferred stock discount................ -- -- (588,000)
Common stock transactions:
Sales of common shares............................... -- -- 216,000
Conversion of Series B preferred stock................. -- -- 5,560,000
-------- ---------- -----------
Balance at January 31, 1998............................ $(73,000) $1,584,000 $22,434,000
Net loss............................................... -- -- (7,336,000)
Foreign currency translation adjustment................ 9,000 -- 9,000
Stock warrants issuance and revaluation................ -- 204,000 204,000
Common stock transactions:
Sales of common shares and exercise of stock
options............................................ -- -- 62,000
-------- ---------- -----------
Balance at January 30, 1999............................ $(64,000) $1,788,000 $15,373,000
Net loss............................................... -- -- (1,127,000)
Stock warrants issuance and revaluation................ -- 503,000 503,000
Notes receivable payments and writeoffs................ -- -- 108,000
Common stock transactions:
Sales of common shares and exercise of stock
options............................................ -- -- 42,000
Preferred stock transactions:
Sale of Series A shares.............................. -- -- 1,220,000
Sale of Series B shares.............................. -- -- 1,525,000
Preferred stock dividends............................ -- -- (101,000)
-------- ---------- -----------
Balance at January 29, 2000............................ $(64,000) $2,291,000 $17,543,000
======== ========== ===========
The accompanying notes are an integral part of these statements.
F-6
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Cash flows from operating activities:
Net (loss) income................................ $(1,127,000) $(7,336,000) $ 87,000
Adjustments to reconcile net (loss)income to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 3,307,000 2,913,000 2,516,000
Deferred income tax............................ -- 140,000 (49,000)
Amortization of debt discount.................. 259,000 114,000 567,000
Asset impairment charge........................ -- 1,302,000 --
(Gain)Loss on disposal of property and
equipment.................................... (104,000) 69,000 --
----------- ----------- -----------
2,335,000 (2,798,000) 3,121,000
Changes in operating assets and liabilities:
Accounts and notes receivable................ 20,000 4,013,000 (3,173,000)
Inventories.................................. 2,620,000 (869,000) (779,000)
Prepaid catalog expenses..................... (472,000) 372,000 567,000
Other prepaid expenses....................... 142,000 353,000 35,000
Deferred financing costs..................... -- -- (482,000)
New product development...................... (576,000) (495,000) (508,000)
Accounts payable............................. (2,569,000) 1,818,000 1,138,000
Reserve for stores to be closed.............. -- -- (245,000)
Reserve for relocation-related expenses...... -- -- (497,000)
Accrued expenses............................. (100,000) 454,000 397,000
Minority interest............................ (4,000) (301,000) (157,000)
Other assets................................. 30,000 165,000 (50,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 1,426,000 2,712,000 (633,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from notes receivable issued in
connection with sale of property and
equipment...................................... 74,000 85,000 --
Proceeds from sale of property and equipment..... 282,000 35,000 --
Net cash paid for acquisitions................... -- -- (50,000)
Purchases of property and equipment.............. (787,000) (2,198,000) (4,171,000)
----------- ----------- -----------
Net cash used in investing activities............ (431,000) (2,078,000) (4,221,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuing common stock............... 42,000 62,000 216,000
Proceeds from issuing Series A and B preferred
stock.......................................... 2,745,000 -- --
Preferred stock dividends........................ -- -- (153,000)
Redemption of Series B preferred stock........... -- -- (500,000)
Notes receivable from officers................... 58,000 -- (273,000)
Net borrowings (repayments) on revolving credit
loan........................................... (2,755,000) 427,000 4,447,000
Proceeds from long-term debt..................... -- -- 8,981,000
Repayments of long-term debt..................... (1,461,000) (1,259,000) (7,286,000)
----------- ----------- -----------
Net cash (used in) provided by financing
activities....................................... (1,371,000) (770,000) 5,432,000
----------- ----------- -----------
Net (decrease) increase in cash.................... (376,000) (136,000) 578,000
Cash and cash equivalents, beginning of period..... 1,615,000 1,751,000 1,173,000
----------- ----------- -----------
Cash and cash equivalents, end of period........... $ 1,239,000 $ 1,615,000 $ 1,751,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-7
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS
Successories, Inc. and its subsidiaries (collectively the "Company") design,
manufacture, and market proprietary and licensed products for business, personal
motivation and for golf enthusiasts. The Company considers itself a single line
of business with products that are marketed primarily under the SUCCESSORIES,
and BRITISH LINKS trade names through direct marketing (catalog, electronic
commerce and telemarketing), retail (Company-owned stores), sales to franchisees
and wholesale distribution channels. The Company operates a chain of
Successories retail stores located primarily in the United States. The Company
also operates a franchising program whereby it sells franchises to market the
Company's products under the SUCCESSORIES trademark.
The franchisee purchases for resale Company manufactured products or
products from others that are Company-approved. Due to the proprietary nature of
most of the Company's products, the Company is the only available source for
many products sold by franchisees. The franchise agreements have an initial term
of five years with a renewal option for three additional successive terms of
five years each. Franchisees pay a royalty to the Company of 2% of franchised
retail store gross sales. At January 29, 2000, there were 25 Company-owned
retail stores and 58 franchised retail stores. And, at January 30, 1999, there
were 36 Company-owned retail stores and 49 franchised retail stores.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The Company's fiscal year ends on the Saturday closest to January 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Successories, Inc. and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The financial
results of franchised stores have not been reflected in the Company's
consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers as cash equivalents all highly liquid instruments with
an original maturity of three months or less. Such investments are stated at
cost, which approximates fair value.
REVENUE RECOGNITION
Net revenues include retail, direct marketing, franchise and wholesale
activities. Retail sales at the Company-owned stores are recognized at the point
of sale, net of returns and allowances. Direct marketing, franchise and
wholesale sales are generally recognized at the time orders are shipped to
customers, net of returns and allowances. The Company's agreements generally
require franchisees and licensees to remit continuing royalty and licensing fees
on gross revenues derived from proprietary product sales. The Company recognizes
these fees as revenue when actually earned.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and includes material, labor and overhead
costs.
F-8
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID CATALOG EXPENSES
Prepaid catalog expenses consist primarily of unamortized mail order catalog
expenses for the Company's products. The cost of such direct response
advertising is charged to expense over the period that the related catalog sales
are expected, not to exceed twelve months. The amortization period is based upon
the Company's historical patterns of catalog response. All other advertising
costs are expensed as incurred.
Catalog related advertising expense was $7,783,000, $8,072,000 and
$7,721,000 for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998, respectively, which is included in operating expenses on the
accompanying consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for on
a straight-line basis over the estimated useful lives of the related assets,
ranging from 3 to 10 years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the useful life of the improvement or the
term of the lease. Major renewals and betterments are capitalized and
maintenance and repair costs are charged to expense as incurred. Gains or losses
resulting from sales or retirements are recorded as incurred, at which time
related costs and accumulated depreciation are written-off.
Depreciation expense was $2,536,000, $2,139,000, and $1,923,000 for the
years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively, which is included in cost of goods sold and operating expenses in
the accompanying consolidated statements of operations.
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining financing are capitalized and
amortized over the term of the related debt. Amortization expense was $97,000
and $82,000 for the years ended January 29, 2000 and January 30, 1999,
respectively, which is included in interest expense in the accompanying
consolidated statements of operations. Accumulated amortization was $223,000 and
$126,000 as of January 29, 2000 and January 30, 1999, respectively.
SOFTWARE DEVELOPMENT
The Company has adopted Statement of Position ("SOP") No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which provides guidance on the accounting for the cost of computer software
developed or obtained for internal use. Costs incurred in the development of
certain products to be used in connection with the Company's services have been
capitalized and are being amortized on a straight-line basis over the estimated
useful life of the product of 3 years. These costs consist primarily of
consulting fees and related expenses. As of January 29, 2000 the amount
capitalized is approximately $100,000. Accumulated amortization was $5,000 for
the year ended January 29, 2000.
INTANGIBLE ASSETS
Intangible assets consist of distribution rights and goodwill. Such assets
are being amortized on a straight-line basis. Distribution rights are being
amortized over a period of 5 years. Goodwill, which
F-9
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
represents the cost of purchased businesses in excess of the fair value of net
assets acquired, is being amortized over 25 years. The Company reviews the
realizability of the intangible assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. To-date,
no such events or changes have occurred, except as disclosed in Note 7.
Accumulated amortization amounted to $1,851,000 and $1,706,000 at January 29,
2000 and January 30, 1999, respectively. Amortization expense was $145,000,
$396,000 and $245,000 for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998, respectively.
ACCOUNTS PAYABLE
Checks outstanding of approximately $894,000 and $417,000, are included in
accounts payable as of January 29, 2000 and January 30, 1999, respectively.
INCOME TAXES
The Company provides for deferred income taxes under the asset and liability
method of accounting. This method requires the recognition of deferred income
taxes based on the future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities, by applying enacted statutory tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
STORE OPENING AND CLOSING COSTS
Costs associated with the opening of new stores are expensed as incurred.
Estimated costs associated with the closing of under-performing Company-owned
stores are recognized in the period a decision has been reached to close the
store.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation with employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost for stock options
is recognized for stock option awards granted at or above fair market value. The
Company complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123).
The Company accounts for stock-based compensation arrangements with
non-employees in accordance with SFAS 123. SFAS 123 established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. Under the fair value-based method,
compensation cost is measured at the grant date based on the value of the award,
which is calculated using an option pricing model, and is recognized over the
service period which is usually the vesting period.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share is computed by dividing the net income (loss) available to
common stockholders by the weighted average number of common shares
F-10
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
outstanding. Diluted earnings per share is similar to basic earnings per share
except the diluted computation gives effect to all dilutive potential common
shares that were outstanding during the period.
COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which establishes new rules for the reporting and display of
comprehensive income (loss) and its components; however, the adoption had no
impact on the Company's net income (loss) or stockholders' equity. SFAS 130
requires foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income (loss).
FOREIGN CURRENCY TRANSLATION
One of the Company's subsidiaries has operations in Canada. The assets and
liabilities of this subsidiary are reported in local currency and translated at
the current exchange rate in effect at the balance sheet date, with gains or
losses resulting from such translation included in stockholders' equity.
Revenues and expenses are translated at the average exchange rate in effect at
the time the underlying transaction occurred, with gains or losses resulting
from such translation included in stockholders' equity. Realized currency gains
or losses on transactions are included in the results of operations.
FINANCIAL INSTRUMENTS
The carrying amounts for current assets and current liabilities approximate
their fair value due to their short-term maturity periods. The carrying amount
of long-term debt reasonably approximates its fair value as the stated interest
rates approximate current market interest rates of debt with similar terms.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-11
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
Accounts receivable......................................... $ 3,722,000 $ 3,937,000
Notes receivable............................................ 552,000 542,000
----------- -----------
4,274,000 4,479,000
Less allowance for doubtful accounts and sales returns...... (549,000) (660,000)
----------- -----------
3,725,000 3,819,000
Less current portion........................................ (3,430,000) (3,522,000)
----------- -----------
Noncurrent portion.......................................... $ 295,000 $ 297,000
=========== ===========
A portion of the Company's sales are made through the extension of credit.
Accounts receivable from credit sales are generally unsecured. Notes receivable
are primarily from franchisees, and are generally secured by a personal
guarantee and the assets of the franchised operations.
In the current year-ended January 29, 2000, the Company converted three of
its company-owned retail stores to franchised stores. The aggregate price for
the sale of the stores net assets and inventory was $515,000, of which $395,000
was paid in cash and the balance of $120,000 was financed with promissory notes.
The payments on the promissory notes are due from May 2000 through
February 2001. The interest rates on the promissory notes are 8%.
In the prior year-ended January 30, 1999, the Company converted five of its
company-owned retail stores to franchised stores. The aggregate price for the
sale of the stores' net assets was $512,000, of which $35,000 was paid in cash
and the balance of $477,000 was financed with promissory notes. The payments on
the promissory notes are being made monthly from July 1998 through
October 2002. The interest rates on the promissory notes range from 7% to 9%.
NOTE 4. INVENTORIES
Inventories are comprised of the following:
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
Finished goods.............................................. $5,835,000 $ 8,199,000
Raw materials............................................... 2,487,000 2,638,000
---------- -----------
8,322,000 10,837,000
Less reserve for obsolescence............................... (324,000) (219,000)
---------- -----------
$7,998,000 $10,618,000
========== ===========
F-12
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JANUARY 29, JANUARY 30,
2000 1999
------------ -----------
Leasehold improvements...................................... $ 7,611,000 $ 7,822,000
Machinery and equipment..................................... 7,631,000 7,049,000
Furniture and fixtures...................................... 4,100,000 4,159,000
Vehicles.................................................... 19,000 19,000
------------ -----------
19,361,000 19,049,000
Less accumulated depreciation and amortization.............. (11,428,000) (9,150,000)
------------ -----------
$ 7,933,000 $ 9,899,000
============ ===========
NOTE 6. DEBT
Debt is comprised of the following:
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
Bank borrowings:
Term loan, net of unamortized debt discount of $782,000
and $477,000............................................ $ 4,133,000 $ 5,800,000
Revolving credit loan..................................... 2,119,000 4,874,000
Fixed rate loan, net of unamortized debt discount of
$200,000 and $260,000................................... 300,000 240,000
Capital lease obligations................................... 72,000 170,000
----------- -----------
6,624,000 11,084,000
Less current portion........................................ (3,250,000) (6,035,000)
----------- -----------
Long-term debt.............................................. $ 3,374,000 $ 5,049,000
=========== ===========
On June 20, 1997, the Company entered into a credit facility agreement with
The Provident Bank (the "Bank"). Per the agreement, as amended most recently on
April 6, 2000, the facility is comprised of a $7.5 million term loan and a
revolving credit loan. The revolving credit loan provides for maximum borrowings
of $9 million through May 1, 2000 and for each succeeding July 1 through
December 31; the maximum borrowings at all other times is $6 million. Borrowings
under the revolving credit loan are limited to 85% of eligible receivables plus
57% of eligible inventory, as defined, provided that from February through April
eligible inventory is limited to $5 million through the year 2000 and
$3 million in years thereafter. A commitment fee of 0.5% is payable on the daily
unused amount of the maximum revolving credit commitment. The facility expires
in June 2003, and borrowings under the facility are secured by substantially all
the assets of the Company. The interest rates on the term loan and revolving
credit loan borrowings generally fluctuate based on the margin ratio, as
defined, from a minimum of prime plus 0.50% to a maximum of prime plus 3.00% on
the term loan, and a minimum of prime to a maximum of prime plus 3.00% on the
revolving credit loan. Interest is payable monthly. The interest rate on the
term loan and revolving credit loan was 11.50% at January 29, 2000. The term
loan is payable in quarterly installments of $312,500 through June 1, 2000, and
$375,000 thereafter. Prepayments on the loans are
F-13
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. DEBT (CONTINUED)
required in certain cases including, among others, equity offerings and asset
dispositions. Further, the Company must annually prepay the loans in an amount
equal to 60% of excess cash flow, as defined. As of January 29, 2000, available
borrowings on the revolving credit loan were $3,634,000. On June 20, 1997,
warrants to purchase 150,000 shares of the Company's common stock were issued to
the Bank as part of this agreement. Initially these warrants had exercise prices
ranging from $6.19 to $9.73 and expiration dates in June 2001; however, the
exercise prices were subsequently adjusted to $2.00 and the expiration dates
were extended to June 2005.
In July 1997, the agreement for the credit facility was amended to include
an additional $500,000 fixed rate loan. The loan bears interest at 12% and is
due in June 2003. Warrants to purchase an additional 72,464 shares of the
Company's common stock were issued to the Bank in connection with this amendment
and initially had an exercise price of $6.90 and an expiration date of
July 2003; however, the exercise price was subsequently adjusted to $2.00 and
the expiration date was extended to July 2005.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on capital
expenditures and additional indebtedness, and restrictions on the payment of
dividends.
On April 6, 2000, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio and fixed charge coverage for the year ended January 29, 2000, and to
adjust certain other covenants and limitations prospectively. The amended
agreement requires that (i) adjusted EBITDA, as defined, which is based on a
rolling four quarter period, may not be less than $3,050,000 for the quarter
ended April 29, 2000, $3,200,000 for the quarter ended July 29, 2000, $3,350,000
for the quarter ended October 28, 2000, $3,480,000 for the year ended
February 3, 2001, and $3,600,000 for each quarter and year ended thereafter;
(ii) the interest coverage ratio, as defined, may not be less than 2.60 to 1.00
for the quarter ended April 29, 2000, 2.75 to 1.00 for the quarter ended
July 29, 2000, 3.15 to 1.00 for the quarter ended October 28, 2000 and 3.40 to
1.00 for each quarter and year ended thereafter; (iii) the fixed charge
coverage, as defined, not applicable for the quarter ended April 29, 2000, may
not be less than 1.25 to 1.00 for the quarter ended July 29, 2000, 1.15 to 1.00
for the quarter ended October 28, 2000, 1.10 to 1.00 for each quarter and year
ended through July 31, 2001, and 1.15 to 1.00 for each quarter and year ended
thereafter. Also, the limitation on the borrowings against eligible inventory,
as defined, of 57% was extended through the end of the credit agreement term.
F-14
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. DEBT (CONTINUED)
In conjunction with the April 6, 2000 amendment, the exercise price of the
warrants to purchase 300,000 shares of common stock previously issued to the
Bank were reduced to $2.00. The impact of revaluation of warrants is additional
debt discount expense of approximately $33,000 to be recognized from fiscal 2000
through fiscal 2003.
On April 28, 1999, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio, fixed charge coverage, debt to EBITDA ratio, and capital expenditure
limitation covenants for the year ended January 30, 1999, and adjust certain
other covenants prospectively. The amended agreement required that (i) adjusted
EBITDA, as defined, which is based on a rolling four quarter period, may not be
less than a loss of $1,565,000 for the four quarters ended May 1, 1999, and
increases each subsequent quarter to $6,800,000 for the four quarters ended
October 31, 2000; and for each quarter thereafter; (ii) the interest coverage
ratio, as defined, may not be less than 0.75 to 1.0 at October 30, 1999, and
increases each subsequent quarter to 5.0 to 1.0 for the quarter ended April 30,
2000 and for each quarter thereafter; (iii) the fixed charge coverage, as
defined, may not be less than 2.6 to 1.0 at January 29, 2000, and 1.5 to 1.0
thereafter; and (iv) the debt to EBITDA ratio, as defined, may not be greater
than 3.0 to 1.0 at January 29, 2000 and thereafter. Also, in certain cases where
prepayments on the loans are made in connection with equity offerings, the
amendment provided that certain quarterly installments on the term loan will be
deferred and the limits on borrowings relating to eligible inventory under the
revolving credit loan will be increased.
In conjunction with the April 28, 1999 amendment, warrants to purchase an
additional 300,000 shares of the Company's Common Stock were issued to the Bank
at an exercise price of $2.50 that expire in July 2005, the expiration dates of
the 150,000 warrants previously issued to the bank on June 20, 1997 were
extended an additional two years to June 2005 and the Company paid the bank a
fee equal to 0.5% of the aggregate commitments under the facility. The bank fee
of $82,000 is included in interest expense in the accompanying financial
statements for the year ended January 29, 2000. The impact of issuance of
additional warrants and revaluation of certain existing warrants was an
additional debt discount expense of approximately $503,000 to be recognized from
fiscal 1999 through fiscal 2003.
On May 14, 1998, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA") and interest coverage
ratio covenants for the year ended January 31, 1998, and adjust certain other
covenants. The amended agreement required that (i) EBITDA, which is based on a
rolling four quarter period, may not be less than $4 million for the four
quarters ended May 2, 1998, and increases each subsequent quarter to
$6.8 million for the four quarters ended February 3, 2001 and each quarter
thereafter and (ii) the interest coverage ratio, as defined, not be less than
3.0 to 1.0 from May 2, 1998 through October 31, 1998, 4.0 to 1.0 at January 30,
1999, 4.5 to 1.0 at May 1, 1999 and July 31, 1999, and 5.0 to 1.0 thereafter. In
addition, on September 1, 1998, the agreement was again amended to waive the
EBITDA covenant, the interest charge coverage ratio and other related covenants
for the second quarter of fiscal 1998 provided that EBITDA for the third quarter
of fiscal 1998 was not less than $1.6 million. On December 11, 1998, the Company
obtained a waiver from the bank for the EBITDA and interest coverage covenants
for the third quarter ended October 31, 1998.
In conjunction with the May 14, 1998 amendment, the exercise prices of the
warrants to purchase 222,464 shares of common stock previously issued to the
Bank were reduced to $5.85 and their expiration dates were extended for one
year. In conjunction with the September 1, 1998 amendment, the exercise prices
of these warrants were reduced to $3.00 and their expiration dates were extended
for another year. In conjunction with the waiver obtained on December 11, 1998,
the exercise prices of these warrants were
F-15
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. DEBT (CONTINUED)
reduced to $2.00. The impact of issuance of additional warrants and revaluation
of certain existing warrants was an additional debt discount expense of
approximately $204,000 to be recognized from fiscal 1998 through fiscal 2003.
During the year ended January 29, 2000, pursuant to the terms of the Bank
credit agreement, $2,745,000 of proceeds from the sale of convertible preferred
stock by the Company were used to make a prepayment on the three quarterly
installments through December 1, 1999 on the term loan in the amount of
$1,000,000 and $1,745,000 was applied against the revolving credit loan. For
further information on the sale of convertible preferred stock by the Company,
see Note 14.
The stock warrants issued in conjunction with the credit facility and
certain other financing transactions were assigned a fair value using the
Black-Scholes option pricing model. The fair value of the warrants have been
reflected as a discount on the debt and are being amortized as interest expense
over the terms of the related debt. Interest expense related to these warrants
amounted to $259,000, $114,000, and $567,000 for the years ended January 29,
2000, January 30, 1999 and January 31, 1998, respectively.
The weighted average interest rates on borrowings outstanding as of
January 29, 2000 and January 30, 1999 were 10.58% and 9.9%, respectively.
Aggregate future maturities of debt are as follows:
Fiscal year ending:
February 3, 2001.............................. 3,544,000
February 2, 2002.............................. 1,507,000
February 1, 2003.............................. 1,507,000
January 31, 2004.............................. 1,048,000
----------
$7,606,000
==========
CAPITAL LEASES
The Company acquired certain equipment under lease arrangements which are
being accounted for as capital leases for accounting purposes. Equipment under
such leases has been recorded as property and equipment with a cost of
approximately $961,000 as of both January 29, 2000 and January 30, 1999, and
accumulated amortization of $961,000 and $885,000 at those dates, respectively.
Amortization expense was $76,000, $149,000, $115,000 for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998, respectively.
F-16
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. DEBT (CONTINUED)
The future minimum lease payments for all capital leases in effect as of
January 29, 2000, are as follows:
Fiscal year ending:
February 3, 2001.......................................... 53,000
February 2, 2002.......................................... 10,000
February 1, 2003.......................................... 10,000
January 31, 2004.......................................... 9,000
--------
Total minimum lease payments................................ 82,000
Less amount representing interest........................... (10,000)
--------
Present value of net minimum lease payments................. $ 72,000
========
NOTE 7. ASSET IMPAIRMENT CHARGE
In October 1996, the Company acquired the stock of British Links Golf
Classics, Inc., (British Links) a catalog company specializing in golf-related
wall decor, gifts and other collectibles for approximately $1.4 million.
Substantially all the purchase price was allocated to goodwill. Subsequently,
pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Company evaluated the
realizability of the intangibles related to its British Links business.
While the Company was able to achieve certain incremental sales of
golf-related products using its in-house mailing lists, other operating
efficiencies related to merchandising and fulfillment which were contemplated at
the time of the acquisition have not been fully realized. In September 1998, the
Company announced that it would focus its future growth on its core motivational
products business and its two most profitable distribution channels: direct
marketing SUCCESSORIES and franchise. Because anticipated consumer demand for
golf gifts has developed more slowly than originally expected, and because plans
to sell the golf catalog business to a strategic buyer have yet to materialize,
the Company determined that the estimated future value of cash flows related to
British Links is below the carrying value of the related goodwill. Given that
the value of future cash flows is uncertain due to market conditions, during the
year ended January 30, 1999 the Company recorded an asset impairment charge of
approximately $1.3 million, which represents the unamortized carrying value of
the goodwill for British Links.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Current:
Federal........................................ $ -- $ -- $ --
State.......................................... 60,000 25,000 18,000
Foreign........................................ -- (105,000) 85,000
Deferred......................................... -- 140,000 (49,000)
------- --------- --------
$60,000 $ 60,000 $ 54,000
======= ========= ========
F-17
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES (CONTINUED)
A reconciliation between the federal statutory rate and the Company's
effective tax rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Federal statutory rate........................... 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit.......... 5.0 5.0 5.0
Foreign taxes in excess of domestic rate......... -- -- 21.3
Other, primarily permanent items................. -- -- (22.0)
Valuation allowance.............................. (33.4) (38.2) --
----- ----- -----
5.6% 0.8% 38.3%
===== ===== =====
Deferred income taxes result from temporary differences in the recognition
of revenues and expense for financial and income tax reporting purposes. The
components of the net deferred tax asset are comprised of the following:
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
Deferred tax assets:
Accounts receivable.............................. $ 78,000 $ 244,000
Inventories...................................... 151,000 109,000
Depreciation and amortization.................... 1,039,000 925,000
Loss carryforwards............................... 7,478,000 6,827,000
Other, primarily accruals........................ 188,000 359,000
----------- -----------
8,934,000 8,464,000
----------- -----------
Deferred tax liabilities:
Prepaid advertising.............................. 759,000 592,000
----------- -----------
$ 759,000 $ 592,000
Less valuation allowance........................... (2,976,000) (2,673,000)
----------- -----------
Net deferred tax asset............................. $ 5,199,000 $ 5,199,000
=========== ===========
Realization of the net deferred tax asset is largely dependent upon the
Company generating sufficient taxable income prior to the expiration of the net
operating loss carryforwards. However, the amount of such realization could be
reduced in the near term if estimates of future taxable income during the
carryforward period are changed. To the extent the net operating loss
carryforwards and existing deductible temporary differences are not offset by
existing taxable temporary differences reversing within the carryforward period,
the remaining loss carryforwards are expected to be realized by achieving future
profitable operations. Although the Company has incurred a net loss in the past
two years and has an accumulated deficit of $13,563,000 as of January 29, 2000
and realization of the net deferred tax asset is not assured, management
believes that it is more likely than not that the net deferred tax asset will be
realized.
F-18
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES (CONTINUED)
The Company has approximately $19,175,000 of tax net operating loss
carryforwards as of January 29, 2000, which are available to reduce future
taxable income and expire as follows:
2009....................... $ 526,000
2010....................... $11,082,000
2011....................... $ 1,496,000
2019....................... $ 4,401,000
2020....................... $ 1,670,000
-----------
Total...................... $19,175,000
===========
NOTE 9. EARNINGS (LOSS) PER SHARE
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The computations of basic
and diluted earnings loss per share are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Basic and diluted loss per share:
Net (loss) income.............................. $(1,127,000) $(7,336,000) $ 87,000
Preferred stock dividends and accretion........ (101,000) -- (741,000)
----------- ----------- ----------
Loss available to common stockholders.......... $(1,228,000) $(7,336,000) $ (654,000)
=========== =========== ==========
Weighted-average shares........................ 6,927,668 6,768,929 6,283,662
=========== =========== ==========
Basic and diluted loss per share............... $ (.18) $ (1.08) $ (.10)
=========== =========== ==========
The diluted computations for the years ended January 29, 2000, January 30,
1999 and January 31, 1998, did not assume the exercise of stock options and
warrants, nor the conversion of preferred stock due to their antidilutive effect
on loss per share. At January 29, 2000, there were options to purchase 1,097,460
shares of stock, warrants to purchase 522,464 shares of stock and preferred
stock convertible into 604,759 shares of stock outstanding. See Note 13 for
further information on stock options and warrants, and Note 14 for details on
preferred stock.
NOTE 10. RELATED PARTY TRANSACTIONS
A shareholder of the Company also serves as a consultant to the Company on
various tax and financial matters. Fees paid to his firm for these services were
$48,000, $179,000 and $85,000 for the years ended January 29, 2000, January 30,
1999 and January 31, 1998, respectively. Management believes these transactions
are arm's length transactions.
F-19
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
A shareholder of the Company also serves as legal counsel to the Company.
Fees paid to the law firm in which he is a partner for said services were
$129,000, $103,000 and $151,000 for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively. Management believes these
transactions are arm's length transactions.
In the current year, the Company received proceeds from the sale of
convertible preferred stock to the Company's Chairman of the Board of Directors,
a director and an executive officer, in an aggregate amount of $1,975,000. For
further information on the sale of convertible preferred stock by the Company,
see Note 14.
NOTE 11. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" as of January 30, 1999. This Statement
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and in interim financial
reports issued to shareholders.
The Company's reportable segments are the various distribution channels used
to market its products. The Company's products have similar purposes and uses in
each channel of distribution, but profitability varies among the channels. The
Company considers itself a single line of business with products that are
marketed through direct marketing (catalog, electronic commerce and
telemarketing), retail (Company-owned stores), wholesale and franchise channels.
The Company has five reportable segments--Direct Marketing--Successories, Direct
Marketing--Golf, Retail Company-owned stores, Wholesale and Sales to
Franchisees.
The accounting policies of the reportable segments are the same as those
described in Note 2 of Notes to Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on income(loss) before
other income(expense) and income taxes.
F-20
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" row includes corporate
related items not allocated to reportable segments.
NET SEGMENT TOTAL CAPITAL DEPRECIATION
SALES PROFIT (LOSS) ASSETS EXPENDITURES AND AMORTIZATION
- ---------------------------------------------------------------------------------------------------------
FISCAL 1999:
Direct Marketing
Successories.............. $28,901,000 $ 5,871,000 $ 3,275,000 $ -- $ 19,000
Direct Marketing Golf....... 1,485,000 (133,000) 495,000 -- --
Retail Company-owned
stores.................... 13,406,000 32,000 4,697,000 120,000 1,152,000
Wholesale................... 880,000 (305,000) 118,000 -- --
Sales to Franchisees........ 7,030,000 1,778,000 1,572,000 -- 20,000
Other....................... -- (8,370,000) 19,592,000 667,000 2,116,000
CONSOLIDATED.............. $51,702,000 $(1,127,000) $29,749,000 $ 787,000 $3,307,000
- ---------------------------------------------------------------------------------------------------------
FISCAL 1998:
Direct Marketing
Successories.............. $25,740,000 $ 4,519,000 $ 2,066,000 $ -- $ 32,000
Direct Marketing Golf....... 3,372,000 (2,479,000) 764,000 -- 88,000
Retail Company-owned
stores.................... 16,330,000 (824,000) 6,527,000 1,245,000 763,000
Wholesale................... 1,814,000 (236,000) 1,079,000 -- --
Sales to Franchisees........ 5,608,000 1,373,000 1,456,000 -- 19,000
Other....................... -- (9,689,000) 22,808,000 953,000 2,011,000
CONSOLIDATED.............. $52,864,000 $(7,336,000) $34,700,000 $2,198,000 $2,913,000
- ---------------------------------------------------------------------------------------------------------
FISCAL 1997:
Direct Marketing
Successories.............. $23,759,000 $ 4,833,000 $ 4,705,000 $ -- $ 47,000
Direct Marketing Golf....... 3,430,000 (410,000) 2,043,000 -- 33,000
Retail Company-owned
stores.................... 17,755,000 1,078,000 7,007,000 318,000 872,000
Wholesale................... 6,173,000 1,460,000 2,849,000 -- --
Sales to Franchisees........ 5,704,000 1,878,000 1,093,000 -- 19,000
Other....................... -- (8,752,000) 22,884,000 3,853,000 1,545,000
CONSOLIDATED.............. $56,821,000 $ 87,000 $40,581,000 $4,171,000 $2,516,000
- ---------------------------------------------------------------------------------------------------------
The Company utilizes its facilities and majority of its assets
interchangeably among each distribution channel. Assets that relate specifically
to a reportable segment have been included in the above table. Assets identified
to the reportable segments are primarily cash, receivables, inventory, prepaid
catalogs, property and equipment, and intangibles.
F-21
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SEGMENT AND RELATED INFORMATION (CONTINUED)
The following table presents the details for "Other" segment profit (loss):
1999 1998 1997
---------- ---------- ----------
Corporate expenses....................................... $4,660,000 $6,119,000 $5,280,000
Unallocated depreciation and amortization expense........ 2,116,000 2,011,000 1,545,000
Other expense............................................ 1,534,000 1,499,000 1,873,000
Income tax expense....................................... 60,000 60,000 54,000
---------- ---------- ----------
$8,370,000 $9,689,000 $8,752,000
========== ========== ==========
Corporate expenses are primarily charges for those functions not
specifically attributable to any specific segment; these functions include the
product development, merchandising, information systems, accounting, legal,
human resource and executive departments. Included in the expenses associated
with these functions are payroll and related costs, professional fees,
information system maintenance costs, office occupancy costs, and property and
casualty insurance.
The Company's operations are principally in the United States. Operations
outside of the United States are primarily in the United Kingdom and Australia.
No single foreign country or geographic area is significant to the consolidated
operations. Foreign operations' net sales were $273,000, $480,000, and $534,000,
for fiscal 1999, 1998 and 1997, respectively. Long-lived assets are all located
in the United States.
The Company's products include distinctive lines of wall decor, desktop art,
books and greeting cards, computer and audio products, personalized gifts and
awards, and mugs. In addition, the Company sells other motivational products
supplied by third parties. In fiscal 1999 and fiscal 1998, sales by product
categories comprised of approximately 46% and 44% wall decor, 22% and 23%
desktop art, 18% and 17% books and greeting cards, 2% and 4% computer and audio
products, 11% and 9% personalized gifts and awards and 1% and 3% other products,
respectively. Information pertaining to sales by product categories for fiscal
1997 was not available due to system limitations.
In fiscal 1999, 1998 and 1997, no single customer or group under common
control represented 10% or more of the Company's sales.
F-22
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statements of cash flows are as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Cash paid during the year for:
Income taxes................................... $ 44,000 $ 26,000 $ 10,000
Interest....................................... 1,260,000 1,188,000 958,000
Noncash investing and financing activities:
Equipment purchased under capital leases....... -- -- $203,000
Notes receivable issued on sale of property and
equipment.................................... -- $ 477,000 --
Acquisitions of businesses:
Fair value of assets acquired................ -- -- 230,000
Preferred stock dividends...................... $ 101,000 -- --
NOTE 13. OPTIONS AND WARRANTS
The Company has a stock option plan (the "Option Plan") which provides for
the grant of stock options to directors, executive officers and other employees
of the Company. On July 22, 1998, the number of Company's common stock shares
available for grant under the Option Plan increased from 1,450,000 to 1,700,000
shares. The number of options to be granted or issued and the terms thereof are
approved by the Compensation Committee of the Company's Board of Directors,
which is comprised of non-employee directors. The exercise price of the options
is equal to the fair market value of the common stock on the date of grant.
Options granted under the Option Plan generally vest after five years and expire
ten years from the date of grant.
The Company has a non-compensatory Employee Stock Purchase Plan. The Company
intends that the Stock Purchase Plan qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code. Generally, the Stock
Purchase Plan provides for qualifying employees to elect to have a percentage of
their compensation used to purchase shares of the Company's common stock. Shares
purchased under the Stock Purchase Plan totaled 19,920, 20,850 and 44,451 for
the years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively.
The Company measures compensation cost for its stock plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation has been recognized for the Company's
stock plans in the consolidated financial statements. Had compensation cost
under these plans been determined consistent with the method outlined in SFAS
F-23
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. OPTIONS AND WARRANTS (CONTINUED)
No. 123, the Company's net (loss) income and loss per share would have been
reduced to the following pro forma amounts:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
Net income (loss):
As reported.................................. $(1,127,000) $(7,336,000) $ 87,000
Pro forma.................................... (1,249,000) (7,905,000) (494,000)
Basic and diluted loss per share:
As reported.................................. (.18) (1.08) (.10)
Pro forma.................................... (.19) (1.17) (.18)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998: risk-free interest rate of 4.94%, 4.71%, and 6.61%,
respectively; expected dividend yield of 0% for all three fiscal years; expected
life of 10 years for all three fiscal years; and expected volatility of 85.39%,
88.63% and 93.94%, respectively.
A summary of the status of the Option Plan as of January 29, 2000,
January 30, 1999 and January 31, 1998, and changes during the periods then ended
are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
--------- --------- --------- --------- --------- ---------
Outstanding, beg. of year......... 1,436,528 $5.77 1,293,170 $6.24 1,001,750 $6.34
Granted........................... 77,000 2.82 206,000 3.00 470,000 5.85
Exercised......................... -- -- -- -- -- --
Forfeited......................... (246,440) 6.18 (32,914) 6.41 (178,580) 5.75
Expired/canceled.................. (169,628) 7.06 (29,728) 6.26 -- --
--------- --------- ---------
Outstanding, end of year.......... 1,097,460 5.27 1,436,528 5.77 1,293,170 6.24
Exercisable, end of year.......... 797,985 5.78 869,006 6.25 611,750 6.22
Weighted-average fair value of
options granted................. $2.50 $2.62 $5.27
As of January 29, 2000, 243,000 of the options outstanding have exercise
prices ranging between $2.125 and $5.33, with a weighted-average exercise price
of $2.62 and a weighted-average remaining contractual life of 9.9 years (54,900
of these options are exercisable with a weighted-average exercise price of
$2.54). In addition 735,460 options have exercise prices ranging between $5.33
and $6.875, with a weighted-average exercise price of $5.62 and a
weighted-average remaining contractual life of 5.8 years (629,685 of these
options are exercisable with a weighted-average exercise price of $5.66). The
remaining 119,000 options have exercise prices ranging between $6.875 and
$14.66, with a weighted-average exercise price of $8.56 and a weighted-average
remaining contractual life of 6.9 years (113,400 of these options are
exercisable with a weighted-average exercise price of $8.61).
F-24
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. OPTIONS AND WARRANTS (CONTINUED)
During the year ended January 30, 1999, an executive officer of the Company
exercised stock options granted prior to the adoption of the Option Plan. In
November 1996, the Company received shares of common stock in exchange for
options to purchase 165,000 shares of common stock. Options to purchase 31,350
shares were exercised in November 1996. Options to purchase the remaining
133,650 shares were exercised on January 15, 1999.
The Company has also issued stock warrants primarily in connection with
certain financing transactions. Such warrants generally vest immediately and
expire five to eight years from the date of grant. As of January 29, 2000,
warrants for 522,464 shares to purchase common stock of the Company were
outstanding. These warrants have weighted-average exercise price of $2.00 and a
weighted-average remaining contractual life of 5.5 years. The weighted-average
fair value of the warrants granted during the years ended January 29, 2000,
January 30, 1999, and January 31, 1998 were $1.58, $1.58, and $3.23,
respectively.
The fair value of each warrant is estimated on the date of issue using the
Black-Scholes pricing model with the following assumptions for the years ended
January 29, 2000, January 30, 1999, and January 31, 1998: risk-free interest
rate of 5.26%, 4.71%, and 6.61%, respectively; expected dividend yield of 0% for
the three fiscal years; expected life of 6.25 years, 5 years and 5 years,
respectively; and expected volatility of 62.5%, 59.5%, and 60.8%, respectively.
NOTE 14. CONVERTIBLE PREFERRED STOCK
On May 28, 1999, the Company authorized and issued 503,092 shares of
Series A convertible preferred stock to a group of investors, pursuant to
Regulation D of the Securities Act of 1933. The Series A preferred stock has a
par value of $0.01 per share and a purchase price of $2.425 per share. On
October 18, 1999, the Company authorized and issued 101,667 shares of Series B
convertible preferred stock to a group of investors, pursuant to Regulation D of
the Securities Act of 1933. The Series B preferred stock has a par value of
$0.01 per share and a purchase price of $15 per share. The total proceeds of
$2,745,000 from the sale of Series A and Series B preferred stock is comprised
of $1,975,000 from related parties (see Note 10) and $770,000 from outside
investors. Dividends on the preferred stock accrue and are payable quarterly in
either cash or common stock, at the Company's discretion, at the rate of 8% per
annum, commencing on the date of issuance. Accrued and unpaid dividends shall be
paid on (1) April 30, July 31, October 31, and January 31 of each year
commencing on July 31, 2000 for Series A preferred stock and October 31, 2000
for Series B preferred stock, to the holders of record as they appear on the
books and records of the Company 10 days preceding each payment date, and
(2) the date certificates representing common stock of the Company are required
to be delivered following any conversion of Series A and Series B convertible
preferred stock. Holders of the preferred stock have the right to convert their
shares, in whole or in part, into the Company's common stock. Each preferred
share of Series A and Series B may be converted, at any time at the option of
the holder thereof, into certain number of the Company's common stock as is
determined by dividing the stated value of Series A and Series B preferred stock
by the applicable conversion price. The conversion price initially shall mean,
with respect to the Series A preferred stock, an amount equal to $2.425 per
share and, with respect to the Series B preferred stock, an amount equal to
$2.3625 per share; provided that each such initial conversion price shall be
subject to adjustment per the stated terms in the agreement. The above mentioned
issuance of preferred stock also has certain other rights including pre-emptive
rights, voting rights, board representation, registration rights, and
liquidation preference. At any time commencing one year after the date of
F-25
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. CONVERTIBLE PREFERRED STOCK (CONTINUED)
issuance of the preferred stock, the holders of a majority of the preferred
stock may require the Company to file a registration statement covering the
conversion of such preferred stock to common stock.
NOTE 15. 401(k) PLAN
The Company has a 401(k) Retirement Savings Plan in which all full-time
employees who have completed one year of service are eligible to participate.
Enrollment is open on the January 1(st), April 1(st), July 1(st), or
October 1(st) immediately following one year of service. The Company matches 20%
of each employee's contribution, up to a maximum of 6% of base salary. The
Company's contributions to the 401(k) Plan were $41,000, $36,000, and $29,000,
for the years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively.
NOTE 16. ACQUISITIONS
On July 30, 1999, the Company purchased certain assets of a franchisee who
operated a Successories retail location in New York. The purchase price of
approximately $130,000 was paid in cash. The transaction resulted in goodwill of
$5,000.
On September 18, 1997, the Company purchased certain assets of a franchisee
who operated a Successories retail location in California. The purchase price of
approximately $230,000 consisted of $50,000 in cash and the forgiveness of
indebtedness owed by the franchisee. The transaction resulted in goodwill of
$185,000.
All of the aforementioned acquisitions were accounted for as purchases and
accordingly, the acquired assets and liabilities assumed have been recorded at
their estimated fair values at the acquisition date. The results of operations
of the acquired businesses have been included in the consolidated financial
statements from their respective dates of acquisition.
NOTE 17. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its corporate office and manufacturing/warehouse space
under the terms of a lease agreement which expires in July 2009. The Company is
responsible for all taxes, maintenance, insurance and operating expenses. The
lease provides for three renewal options of five years each.
All of the Company-owned retail locations are leased under agreements which
expire at various dates through January 2008. A number of the leases contain
renewal options and escalation clauses and generally provide that the Company
pay its proportionate share of the taxes, maintenance and insurance costs. In
addition, certain leases require contingent payments based on sales.
F-26
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The future minimum rental payments for all operating leases with
noncancelable terms in excess of one year as of January 29, 2000, are as
follows:
OFFICE AND RETAIL
WAREHOUSE LOCATIONS TOTAL
---------- ---------- -----------
Fiscal year ending:
February 3, 2001...................... $ 728,000 $ 990,000 $ 1,718,000
February 2, 2002...................... 753,000 962,000 1,715,000
February 1, 2003...................... 771,000 939,000 1,710,000
January 31, 2004...................... 790,000 913,000 1,703,000
January 30, 2005...................... 811,000 734,000 1,545,000
Thereafter............................ 3,750,000 693,000 4,443,000
---------- ---------- -----------
$7,603,000 $5,231,000 $12,834,000
========== ========== ===========
Rental expense for all operating leases was $2,314,000, $2,561,000, and
$2,644,000, for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers. The
agreements provide for aggregate annual salaries of $600,000, and contain
confidentiality and noncompetition provisions. The agreements expire from 2001
through 2002.
LETTER OF CREDIT
The Company has a standby letter of credit outstanding in the amount of
$300,000 that is secured by a certificate of deposit. The letter of credit
serves as security for the lease of the Company's corporate office and
manufacturing/warehouse facility.
LEGAL MATTERS
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company,
filed a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortious interference with contract and violation of the Wisconsin Fair
Dealership Act. In support thereof, Wascher alleges that the Company has not
followed its agreement with Wascher or observed reasonable commercial standards
and good business practices. Wascher alleges and seeks an award in an amount in
excess of $250,000 plus costs, disbursements and attorney's fees, an award of
both treble and punitive damages, and such other relief deemed just and
equitable.
The hearing dates for the Wascher matter were originally scheduled in
January 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
F-27
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Except as noted above, there are no other material pending legal proceedings
against the Company. The Company is, however, involved in routine litigation
arising in the ordinary course of its business and, while the results of the
proceedings cannot be predicted with certainty, the Company believes that the
final outcome of any such matters will not have a materially adverse effect on
the Company's consolidated financial position or results of operations.
F-28
SUCCESSORIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND (1) AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ---------- ---------- ----------- ----------
January 29, 2000
Allowance for doubtful accounts............ $ 515,000 $ 70,000 $ (211,000) $ 374,000
Reserve for sales returns.................. 145,000 651,000 (621,000) 175,000
Tax valuation allowance.................... 2,396,000 580,000 -- 2,976,000
January 30, 1999
Allowance for doubtful accounts............ $ 126,000 $ 584,000 $ (195,000) $ 515,000
Reserve for sales returns.................. 484,000 1,128,000 (1,467,000) 145,000
Tax valuation allowance.................... -- 2,396,000 -- 2,396,000
January 31, 1998
Allowance for doubtful accounts............ $ 196,000 $ 425,000 $ (495,000) $ 126,000
Reserve for sales returns.................. 310,000 842,000 (668,000) 484,000
Tax valuation allowance.................... -- -- -- --
- ------------------------
(1) Write-offs, net of recoveries
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUCCESSORIES, INC.
Date April 18, 2000 By: /s/ JACK MILLER
-----------------------------------------
Jack Miller
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE DATE
--------- ----
/s/ JACK MILLER April 18, 2000
--------------------------------------------------
Jack Miller
CHAIRMAN OF THE BOARD OF DIRECTORS
/s/ GARY ROVANSEK April 18, 2000
--------------------------------------------------
Gary Rovansek
PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
/s/ JOHN C. CARROLL April 18, 2000
--------------------------------------------------
John C. Carroll
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
/s/ ARNOLD M. ANDERSON April 18, 2000
--------------------------------------------------
Arnold M. Anderson
DIRECTOR
/s/ HOWARD I. BERNSTEIN April 18, 2000
--------------------------------------------------
Howard I. Bernstein
DIRECTOR
/s/ LAWRENCE A. HODGES April 18, 2000
--------------------------------------------------
Lawrence A. Hodges
DIRECTOR
SIGNATURE DATE
--------- ----
/s/ R. SCOTT MORRISON, JR. April 18, 2000
--------------------------------------------------
R. Scott Morrison, Jr.
DIRECTOR
/s/ LESLIE NATHANSON JURIS April 18, 2000
--------------------------------------------------
Leslie Nathanson Juris
DIRECTOR
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1 Articles of Incorporation of Registrant--Amended and
Restated as of October 28, 1999 (filed herewith)
3.3 By-laws of Registrant(1)
3.4 Amended and Restate Certificate of Designation of Series A
and Series B Convertible Preferred Stock(19)
4.1 Specimen Common Stock Certificate(18)
4.2 Specimen Series A Cumulative Convertible Preferred Stock
Certificate(20)
4.3 Specimen Series B Cumulative Convertible Preferred Stock
Certificate(20)
10.1 Form of Franchising Agreement(18)
10.2 Stock Option Instrument for Arnold M. Anderson dated
November 19, 1991(1)*
10.3 Celex Group, Inc. Stock Option Plan(1)
10.4 Joint Venture Agreement with Morrison DFW, Inc. and related
documents(4)
10.5 Indemnification Agreement dated April 7, 1999 between the
Company and Arnold M. Anderson(17)*
Indemnification Agreements in the form filed were also
entered into by the Messrs. Seamas T. Coyle, Timothy C.
Dillon, C. Joseph LaBonte, Steven B. Larrick, Michael H.
McKee, Mervyn C. Phillips, Jr., Guy E. Snyder,
Gary Rovansek, R. Scott Morrison, Jr., Jack Miller,
Howard I. Bernstein, Lawrence A. Hodges, and
Leslie Nathanson Juris.
10.6 Form of Subordinated Note, Common Stock Purchase Warrant and
Subordination Agreement relating to issuance of $1,500,000
Subordinated Notes and Warrants to purchase 120,000 shares
of the Company's Common Stock(9)
10.7 Common Stock Option Agreement granted to Arnold M. Anderson
and Incentive Stock Option Agreement granted to Arnold M.
Anderson(9)*
10.8(a) Employment Agreement with Arnold M. Anderson dated March 1,
1996(10)*
10.8(b) Employment Agreement with Arnold M. Anderson dated
January 14, 1997 (filed herewith)*
10.8(c) Addendum to Employment Agreement with Arnold M. Anderson
dated February 16, 2000 (filed herewith)*
10.9 Employment Agreement with Michael H. McKee dated June 1,
1999(18)*
10.10 Form of Subordinated Note Extensions, Stock Options and
Subordination Agreement relating to the extension of
$1,250,000 of Subordinated Notes, and options to purchase
125,000 shares of the Company's Common Stock(2)
10.11 Credit Agreement between the Company and The Provident Bank
dated as of June 20, 1997(13)
10.12 First Amendment to Credit Agreement between the Company and
The Provident Bank dated as of July 16, 1997(13)
10.13 Lease Agreement between LaSalle National Trust, N.A. as
Trustee under Trust No. 120358 and Celex Group, Inc.(14)
10.14 Second Amendment to Credit Agreement between the Company and
The Provident Bank dated as of May 14, 1998(14)
10.15 Third Amendment to Credit Agreement between the Company and
The Provident Bank dated as of September 1, 1998(15)
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
10.16 Employment Agreement with Gary Rovansek dated October 29,
1998(15)*
10.17 Fourth Amendment to Credit Agreement between the Company and
The Provident Bank dated as of April 28, 1999(17)
10.18 Warrants to Purchase Common Stock of the Company granted to
The Provident Bank dated as of April 29, 1999(17)
10.19 Preferred Stock Purchase Agreement, dated as of May 28,
1999, by and among the Company and the investors(16)
10.20 Registration Rights Agreement, dated as of May 28, 1999, by
and among the Company and the investors(16)
10.21 Preferred Stock Purchase Agreement, dated as of October 18,
1999, by and among the Company and the investors(19)
10.22 Registration Rights Agreement, dated as of October 18, 1999,
by and among the Company and the investors(19)
21.1 Subsidiaries of the Registrant(4)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
- ------------------------
* Denotes management contract, or compensatory plan or arrangement required to
be filed as an exhibit.
(1) Previously filed with the Company's Registration Statement on Form SB-2,
No. 33-76530C filed on August 17, 1993, and incorporated herein by
reference.
(2) Previously filed with the Company's Registration Statement of Form S-3,
No. 333-19313, and incorporated herein by reference.
(3) Previously filed with the Company's Post-effective Amendment No. 1 to the
Registration Statement of Form SB-2, No. 33-67530C filed on January 19,
1994, and incorporated herein by reference.
(4) Previously filed with the Company's Annual Report on Form 10-K for the year
ended April 30, 1994, and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter ended
July 31, 1995, and incorporated herein by reference.
(6) Previously filed with the Company's Current Report on Form 8-K filed on
June 7, 1995, reporting Date of Event May 26, 1995, and incorporated herein
by reference.
(7) Previously filed with the Company's Annual Report on Form 10-K for the year
ended April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q Report for the quarter ended
October 28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for the year
ended February 3, 1996, and incorporated herein by reference.
(10) Previously filed with the Company's Form 10-Q Report for the quarter ended
August 3, 1996, and incorporated herein by reference.
(11) Previously filed with the Company's Form 10-Q Report for the quarter ended
November 2, 1996, and incorporated herein by reference.
(12) Previously filed with the Company's Annual Report on Form 10-K for the year
ended February 1, 1997, and incorporated herein by reference.
(13) Previously filed with the Company's Form 10-Q Report for the quarter ended
August 2, 1997, and incorporated herein by reference.
(14) Previously filed with the Company's Form 10-Q Report for the quarter ended
May 2, 1998, and incorporated herein by reference.
(15) Previously filed with the Company's Form 10-Q Report for the quarter ended
October 31, 1998, and incorporated herein by reference.
(16) Previously filed with the Company's Current Report on Form 8-K filed on
June 10, 1999, reporting date of event June 7, 1999, and incorporated
herein by reference.
(17) Previously filed with the Company's Form 10-Q Report for the quarter ended
May 1, 1999, and incorporated herein by reference.
(18) Previously filed with the Company's Form 10-Q Report for the quarter ended
July 31, 1999, and incorporated herein by reference.
(19) Previously filed with the Company's current Report on Form 8-K filed on
November 4, 1999, reporting date of event October 18, 1999, and
incorporated herein by reference.
(20) Previously filed with the Company's Form 10-Q Report for the quarter ended
October 30, 1999, and incorporated herein by reference.